SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended May 31, 1997
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________.
Commission File Number 0-16206
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OAK TREE MEDICAL SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 02-0401674
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
163-03 Horace Harding Expressway, Flushing, New York 11365
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (718) 460-8400
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of Class)
Check whether the Registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes: [ ] No: [X]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |_|
The Registrant's revenues for its most recent fiscal year were $3,344,559.
Number of shares of Common Stock, $.01 par value, outstanding as of January 14,
1998: 4,419,025
Aggregate market value of voting and non-voting Common Stock (3,001,259 shares)
held by non-affiliates computed by reference to the average bid and asked price
of the Common Stock as of January 14, 1998: $12,842,791
Transactional Small Business Disclosure Format: Yes: [ ] No: [X]
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PART I
Item 1. Business
Oak Tree Medical Systems, Inc., a Delaware corporation (the "Company"),
was incorporated in Delaware on May 27, 1986, as Oak Tree Construction
Computers, Inc. From 1986 through 1990, the Company was engaged in the sale of
computer systems for the construction industry. For a number of years
thereafter, the Company was inactive. The Company changed its name to Oak Tree
Medical Systems, Inc. in August 1994. Since January 1995, the Company has been
engaged in the business of operating and managing physical therapy care centers
and related medical practices. Currently, all of the Company's operations are in
the greater New York metropolitan area. The Company through its subsidiary Oak
Tree Medical Management, Inc. operates four New York City based physical therapy
care centers, the management of which the Company acquired in October 1996 and
July 1997. Prior to April 1997, the Company also had operations in Florida.
Unless otherwise indicated by the text, reference herein to the term "Company"
will be deemed to refer to Oak Tree Medical Systems, Inc. and all its
subsidiaries.
Medical Business
The primary focus of the Company to date has been the provision of
physical therapy and related rehabilitative services. Physical therapy aids in
the restoration of patients who have been disabled by injury or disease or are
recovering from surgery. The Company's physical therapy care centers offer
preventive, rehabilitative and pre- and post-operative care for neuromuscular
and musculoskeletal injury. These may include a variety of orthopedic-related
disorders, sports-related injuries, neurologically related injuries, motor
vehicle injuries and work-related injuries.
Patients are primarily referred to the Company's rehabilitation
facilities by physicians. Licensed physical therapists evaluate each patient and
develop a program of rehabilitation to achieve the patient's rehabilitation
goals. Treatments may include traction, ultrasound, electrical stimulation,
therapeutic exercise, heat treatment and hydrotherapy. Patients are usually
treated for one hour per day, three days per week over a period of two to five
weeks. Where appropriate, patients are provided post treatment home maintenance
and exercise programs.
Certain of the Company's clinics offer specific programs for injured
workers compensation patients. The clinic will evaluate the worker's physical
condition and capacity to perform the requirements of his employment. This
evaluation may be used by insurers to estimate the extent of rehabilitation
treatment or as a basis for settlement of disability claims. Thereafter, the
clinic will prescribe and implement a course of "work conditioning" (hardening),
which includes graduated exercise and work stimulation therapies.
The Company believes that purchasers and providers of health care
services such as employers, insurance companies and health maintenance
organizations who are seeking to save on traditional health care services view
physical therapy and rehabilitation services as cost- effective in that they may
prevent short-term disabilities from becoming chronic conditions, and may
accelerate recovery from surgery and neuromuscular and musculoskeletal injuries.
In
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addition, changes in both public and private health insurance reimbursement have
encouraged early hospital discharge, another trend which promotes the need for
outpatient physical therapy services. Also, the aging of the U.S. population has
increased demand for rehabilitation programs to treat chronic conditions of the
elderly.
The Company's strategy has been to take advantage of these trends by
acquiring and integrating a network of physical therapy and rehabilitation
centers, particularly in the Northeastern region of the United States and the
greater New York metropolitan area. The Company believes that attractive
acquisition opportunities exist in its industry because of health care's current
cost containment economics, laws that bar health care practitioners from
referring to entities in which they have an ownership interest and the general
sense of insecurity among health care practitioners resulting from the great
amount of change being experienced by the profession. New reimbursement
schedules and conventions have put particular pressure on the traditional
private practice of medicine and allied health care services. Government health
programs, private insurers and health maintenance type organizations have in
many cases reduced payments to health care professionals and in some cases have
substituted capitation or fixed reimbursement for the traditional "fee for
service" payments.
In this environment, the importance of conducting health care practices,
including physical therapy services, in an efficient and cost-effective manner
has increased. By centralizing non-medical activities, such as administration,
accounting, billing, marketing, procurement and human resources, health care
providers can reduce unit costs, enhance efficiencies and promote profitability.
Centralized management of medical practices also facilitates identification,
negotiation and consummation of advantageous contractual relationships with
health maintenance organizations, preferred provider organizations, hospitals,
nursing homes, school systems and similar institutions. Referrals and contract
work from such organizations and institutions may be essential to the long-term
viability of providers of outpatient rehabilitative services.
Existing Facilities
In October 1996, the Company acquired the management and assets of three
New York City based physical therapy care centers for cash and assumed debt,
totaling $900,000 and 10,000 shares of Common Stock (with aggregate value of not
less than $100,000) issuable in October 1998. Included in the acquisition was a
contract for the provision of physical therapy services to a county hospital in
Westchester, New York. In connection with the acquisition, the Company entered
into a three-year employment agreement with the seller of the clinics, a
licensed physical therapist who continues to serve as the director of operations
of the New York City clinics.
In July 1997, the Company acquired the management and assets an
additional center in New York City for a purchase price of $400,000. The
purchase price may be reduced by $100,000 if the acquired center does not attain
a certain level of billings. In connection with the acquisition, the Company
entered into a lease for the acquired center through August 2003. In addition,
the seller entered into a four-year noncompetition agreement and a six-month
consulting agreement with the Company continuing on a month-to-month basis
thereafter at
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$150,000 per annum. The Company also entered into a six-month consulting
agreement with the physical therapy care center administrator, a relative of the
seller, continuing on a month-to-month basis thereafter at $50,000 per annum.
In compliance with the laws of the State of New York, all treatment
related activities at the Company's New York City clinics are conducted by Oak
Tree Medical Practice, P.C. ("Oak Tree P.C."), an independently owned
professional corporation. The Company has entered into agreements with Oak Tree
P.C. pursuant to which the Company provides to Oak Tree P.C. all administrative
and management services and leases to Oak Tree P.C. facilities and equipment.
Because of the significant influence and control exercised by the Company over
Oak Tree P.C. (other than with respect to patient treatment), the financial
results of Oak Tree P.C. are consolidated with those of the Company.
Acquisition and Rescission
In December 1996, the Company acquired certain assets of four physical
therapy care centers and a management company located in Long Island, New York
for an aggregate purchase price of $650,000 and 132,190 shares of Common Stock
of the Company, plus other consideration.
Effective February 28, 1997, the Company rescinded the acquisition and
the former sellers returned all stock and notes issued to them in the original
transaction. In addition, the former sellers agreed to pay the Company $448,935,
representing the cash purchase price of the original transaction, the net amount
expended by the Company on the facilities for the period from December 1996 to
February 1997, and the purchase price of 12,000 shares of Common Stock acquired
by the former sellers for $15,000. Of this amount, $50,000 was paid at the
closing, $25,000 was paid in May 1997 and the balance was to be paid over an
18-month period. In December 1997, the Company agreed to the early
extinguishment of the remaining amount owed by the former sellers and received
$325,000 in full settlement. The Company remained obligated to issue 14,286
shares of Common Stock to the landlord of one of the acquired facilities in
satisfaction of certain pre-existing obligations. Although the original
acquisition of the Long Island clinics was consistent with the Company's
strategy of focusing its operations in the New York area, the cash flow from
these facilities to the Company was insufficient to support the operations of
these facilities by the Company.
Sales of Florida Centers
Following the Company's October 1996 acquisition of three New York City
based physical therapy care centers and the hospital contract for the provision
of physical therapy services, the Company determined to shift its geographic
focus from North Florida to the New York City area. Consistent with this
approach, in February 1997, the Company sold substantially all of the assets and
operations of its clinics in Jacksonville and Orange Park, Florida. The
Jacksonville assets were held by the Company's Acorn CORF I, Inc. subsidiary and
the Orange Park assets were held by the Company's Riverside CORF, Inc.
subsidiary. In addition, the Company sold all the shares of Oak Tree
Receivables, Inc. ("OT Receivables"), a wholly-owned subsidiary of the Company,
whose assets consisted of certain of the patient care
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receivables of the North Florida facilities and an obligation under the
receivables funding facility secured thereby. The purchase price was $200,000,
consisting of $100,000 in cash paid at closing and a note in the amount of
$100,000 payable in two installments in April and May 1997. As collection of the
remaining amount is not probable, the Company has provided for a reserve against
the entire amount of the note. In connection with the sale of the Florida
centers, the purchaser agreed to assume $86,150 of accounts payable and the
balance of the obligation of the receivables funding facility in the amount of
$1,812,500. In exchange for the consent of the lender of the patient care
receivables funding facility, the Company pledged as collateral to the lender
additional accounts receivable in the amount of $700,000. The Company also
terminated the employment agreement with the facilities' medical director,
received the return of 400,000 shares of Common Stock which had been issued in
connection with the Company's acquisition of the facilities in 1995 and was
relieved from its obligation to issue an additional 145,000 shares of Common
Stock.
Continuing the divestiture of its Florida operations, the Company
disposed of its remaining North Florida facility located in St. Augustine,
Florida in April 1997. The sale price was $25,000 in cash, with $15,000 paid at
closing and $10,000 paid in April and May 1997.
Proposed Acquisition
In September 1997, the Company entered into a letter of intent for the
acquisition of the management and assets of 21 medical practice and MRI centers
located in the greater New York metropolitan area. The letter of intent was
further amended in December 1997. These centers are owned by certain companies
controlled directly or indirectly by Pierce Neuman, M.D. Collectively, the
centers had revenues of approximately $65 million and estimated pre-tax profits
in excess of $19 million in calendar year 1997. Pursuant to the proposed
transaction, which shall take effect, if at all, upon execution of a definitive
written agreement, Dr. Neuman will own or control approximately 60% of the
Company's outstanding shares of Common Stock. There can be no assurance,
however, that the Company will successfully negotiate such definitive written
agreement or meet its obligations of raising capital to complete the
acquisition, or that all the other conditions to closing will be met by any of
the parties to the transaction.
Marketing
Because physicians are the primary source of referrals to the Company's
clinics, the clinics individually focus their marketing efforts on local
orthopedic surgeons, neurosurgeons, physiatrists, occupational medicine
practitioners, and general practitioners. On a corporate level, the Company
seeks to establish referral relationships with health maintenance organizations,
preferred provider organizations, industry and case managers and insurance
companies. The Company is also pursuing contractual relationships for the
provision of rehabilitative services with medical institutions, schools, nursing
homes and home health care companies.
Government Regulation
The health care industry is subject to federal, state and local
regulations. The Company is also subject to laws and regulations relating to
business corporations generally. The Company
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believes its operations are in material compliance with applicable law.
Nevertheless, because of the complexity of the statutes and regulations in the
health care area, many of which have not been subject to judicial or regulatory
interpretation, there can be no assurance that aspects of the Company's
operations will not be subject to legal or administrative challenge. Also, the
health care regulatory environment has been in the past, and is likely to be in
the future, subject to substantial and ongoing change. Accordingly, there can be
no assurance that future changes in the law will not restrict or otherwise
adversely affect the Company's business.
The laws of a number of states, including New York where the Company's
clinics are located, prohibit a corporation from engaging in the provision of
health care, including physical therapy, or from exercising direct control over
professionals engaged in the health care field. The Company believes that its
ownership of physical therapy care centers and the provision of equipment,
location, managerial, administrative and non-medical support services to the
clinics does not constitute the corporate practice of physical therapy, since
licensed physical therapists exercise complete control over the provision of all
physical therapy services. Nevertheless, there can be no assurance that the
statutes prohibiting the corporate practice of physical therapy services will
not be construed or modified in the future to prohibit the operations of the
Company as they are presently being conducted.
There also exist federal and state statutes that impose civil sanctions
and substantial criminal penalties on health care providers that fraudulently or
wrongfully bill governmental and other third-party payors for health care
services. The federal statute prohibiting false billing permits private persons
to bring a civil action in the name of the United States to remedy violations of
the statute. The Company believes that it is in compliance with these fraudulent
billing statutes. However, billing for health care services is technical and
complex, and there can be no assurance that the Company's billing practices will
not be challenged or scrutinized by government authorities.
Competition
The health care industry generally and the physical therapy business in
particular are highly competitive. In addition to corporate-owned,
physician-owned and other private physical therapy clinics, the Company competes
with the physical therapy departments of hospitals and area chiropractic
practices. The competitive factors in the physical therapy business are quality
of care, cost, treatment outcomes, convenience of location and ability to meet
the needs of referral and payor sources. Certain of the Company's competitors
may have substantially greater financial, marketing, developmental and other
resources than the Company. Both larger and smaller competitors may have
individual facilities with greater treatment resources than individual,
competing facilities operated by the Company. Also, the industry is subject to
continuous changes regarding the provision of services and the selection of care
providers, and certain competitors may be more successful than the Company in
adapting to these changes in a timely and effective manner.
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Investment in Gold Ore
In May 1993, the Company acquired 50,000 tons of gold ore from Nevada
Minerals Corporation in exchange for the issuance of 1,350,000 shares of Common
Stock. The ore was appraised as having a $5,000,000 value. The Company
subsequently formed a wholly-owned subsidiary, Aurum Mining Corporation
("Aurum"), with the gold ore as its only asset. In June 1995, the Company
exchanged the stock of Aurum for 6,000,000 shares of common stock of Accord
Futronics Corp. ("Accord"), an unaffiliated privately-held company with other
mining related assets. The Company had the right to receive a royalty of 12 1/2%
of the net mining income from processing of the gold ore transferred to Accord.
In June 1995, the Company granted Accord options, until June 21, 1997,
to acquire 50,000 shares of Common Stock at an exercise price equal to the
lesser of $2.00 per share or 50% of the quoted market price. Accord subsequently
transferred the options to a third party, and these options were exercised by
L.M. Spencer & Associates, Inc., for 50,000 shares of Common Stock at $.50 per
share in exchange for a note receivable due on April 15, 1999 at an interest
rate of 8.5% per annum.
The Company previously announced its intention to write-down its
investment in Accord at the end of the fiscal quarter ended February 28, 1997,
because of the absence of current financial information for Accord and
management's inability to otherwise determine the value of the Accord interest.
The Company subsequently received requested financial information from Accord
and an updated appraisal report which valued the gold ore at $5,181,000. In
November 1997, the Company returned the 6,000,000 shares of common stock of
Accord in exchange for 100% of the common stock of Aurum. At the time of the
return of the Accord stock, Accord had not yet commenced mining operations. The
Company intends to continue to review possibilities of realizing the value of
the gold ore, although there can be no assurance that it will be successful in
doing so.
Employees
As of December 31, 1997, the Company had 32 full-time employees and 10
part-time employees. The Company also hires independent consultants for its
medical service operations from time to time and at December 31, 1997, employed
four persons under consulting arrangements.
Item 2. Properties
The Company's headquarters office is currently located in one of the
Company's physical therapy care centers located at 163-03 Horace Harding
Expressway, Flushing, New York 11365. The Company believes this office is
adequate for its current operations.
Set forth below is certain information concerning the Company's leased
facilities for its rehabilitative and medical service operations, as of December
31, 1997. The Company believes these facilities are adequate for its operations.
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Square Monthly Expiration
Location Footage Rent of Lease
- -------- ------- ------- ----------
1725 Tenbroeck Avenue 2,200 $2,240 month-to-month
Bronx, New York
163-03 Horace Harding Expressway 7,200 $16,950 10/31/02
Flushing, New York
250 West 100th Street 2,200 $4,012 11/30/03
New York, New York
130 William Street 2,850 $3,978 8/31/03
New York, New York
Item 3. Legal Proceedings
Medbrook Corporation v. Ronald W. Dennie, M.D. and 1st Coast Physical
Medicine Associates, Inc., Case No. 95-4524-CA (4th Judicial Circuit, Duval
County, Florida). Plaintiffs in this action sued 1st Coast Physical Medicine
Associates, Inc. ("1st Coast"), the former owner of the Jacksonville, Florida
physical therapy care centers and Dr. Ronald W. Dennie, the medical manager of
the Jacksonville operations, alleging that Dr. Dennie was in violation of a
covenant not to compete with Medbrook Corporation ("Medbrook"). Medbrook had
managed the Jacksonville operations prior to their sale to the Company by Dr.
Dennie. Plaintiff sought damages and injunctive relief. The matter was settled
in December 1997 without material effect on the Company.
Westcap Corporation v. Oak Tree Medical Systems, Inc., Index No.
604059/97 (Supreme Court of the State of New York, County of New York, New
York). A former consultant of the Company recently filed an action against the
Company alleging breach of contract and other claims. The plaintiff sought
$50,000 in monetary damages and warrants to acquire 250,000 shares of Common
Stock. In December 1997, the Company settled the matter by agreeing to issue
22,000 shares of Common Stock to the plaintiff (and, if a certain stock value is
not met, an additional 2,500 shares of Common Stock) and a cash payment of
$3,000.
Irwin Bosh Stack and Irene Stack v. Oak Tree Medical Systems, Inc. and
Henry Dubbin, Case No. 97-17996 CA 13 (11th Judicial Circuit, Dade County,
Florida). In August 1997, a stockholder, the wife of the Company's former
Chairman of the Board of Directors, filed a lawsuit against the Company,
alleging unreasonable restraint on the alienability of her shares of Common
Stock of the Company and breach of fiduciary duty on the part of Mr. Henry
Dubbin. The stockholder claimed that the Company has unjustifiably refused her
request for a opinion letter from counsel to remove a restrictive legend. The
plaintiff is seeking unspecified compensatory and punitive damages and
injunctive relief. Management believes this matter is without merit and will
result in no material adverse effect to the Company.
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U.S. Consultancy, Inc. and FYM, Inc. v. Henry Dubbin, Burton Dubbin,
Fred Singer, William Kedersha, Michael Gerber, Ellis Group, Inc., Liberty
International, Inc., NFC (Service)Ltd. and Oak Tree Medical Systems, Inc., C.A.
No. 15994 (Court of Chancery of the State of Delaware, New Castle County,
Delaware). Plaintiffs filed an action on October 20, 1997, alleging, among other
things, (i) the Company's failure to hold an annual meeting of stockholders
within the time prescribed by Section 211 of Delaware General Corporation Law
(the "DGCL") and (ii) breach of fiduciary duties by current and former officers
and directors of the Company in (a) issuing shares of Common Stock for the
purpose of entrenchment, (b) rejecting potential investment and acquisition
opportunities for personal reasons, (c) engaging in self-dealing and wasteful
transactions, (d) failing to file annual and quarterly reports with the
Securities and Exchange Commission and (e) issuing unregistered stock of the
Company. Plaintiffs sought, among other things, an order compelling the Company
to hold an annual meeting of stockholders, rescission of all issuances of shares
of Common Stock and options to certain individuals pursuant to Form S-8
registration statements filed in June 1997, and unspecified damages. Plaintiffs
also sought to inspect certain books and records of the company pursuant to
Section 220 of the DGCL.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Stock is currently traded in the over-the-counter
market on the OTC Electronic Bulletin Board of the National Association of
Securities Dealers (the "NASD"). The following table sets forth, for the periods
indicated, high and low bid prices for the Common Stock in the over-the-counter
market as reported by the NASD. The information below reflects inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
Low Bid High Bid
Fiscal Year Ended May 31, 1996 ------- --------
First Quarter 2-3/4 8
Second Quarter 7 8-1/2
Third Quarter 6-1/8 9
Fourth Quarter 6 8-7/16
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Fiscal Year Ended May 31, 1997
First Quarter 4-5/8 7-3/4
Second Quarter 4 7-7/8
Third Quarter 3 5-1/2
Fourth Quarter 7/8 2-9/16
As of January 14, 1998, there were approximately 140 holders of record
of the Company's Common Stock. The closing bid and asked prices for the
Company's Common Stock on January 14, 1998, was $2-7/8 and $2-15/16,
respectively.
The Company has not paid any cash dividends on its Common Stock to date,
and the payment of cash dividends in the foreseeable future is not contemplated
by the Company. The future dividend policy will depend on the Company's
earnings, capital requirements, financial condition, and other factors
considered relevant to the Company's ability to pay dividends.
Recent Sales of Unregistered Securities
A. In connection with the Company's acquisition of three physical
therapy care centers in October 1996, the Company issued 54,237 shares of Common
Stock. These shares were issued in settlement of indebtedness in the amount of
$400,000 owed by the seller of the clinics and assumed by the Company.
B. In connection with the Company's acquisition of four physical therapy
care centers and related assets in December 1996, and in partial consideration
for such acquisition, the Company issued to the sellers 6,000 shares of Common
Stock. The Company agreed to issue to the sellers an additional 111,904 shares
of Common Stock on the eighteen month anniversary of the acquisition (increasing
to 142,105 shares if the price per share of Common Stock did not equal or exceed
$7.00 at any time prior to such eighteen month anniversary). The Company also
agreed to issue on the eighteen month anniversary of the acquisition 14,286
shares of Common Stock to the landlord of one of the acquired centers in
satisfaction of certain pre-existing obligations. Effective February 28, 1997,
the Company rescinded its December 1996 acquisition. The former sellers returned
all stock and notes issued to them in the original transaction, and the Company
was relieved from its obligation to issue additional shares of Common Stock to
such former sellers. In connection with the rescission, the former sellers
acquired 12,000 shares of Common Stock for an aggregate purchase price of
$15,000.
C. In December 1996, the Company issued ten year options to acquire
375,000 shares to William Kedersha, the Company's former Chief Executive
Officer. The options have an exercise price of $1 11/16 per share and vest upon
the earlier to occur of the Company's achievement of certain financial
benchmarks, the five year anniversary of the issuance of the options or a change
of control (as defined). In September 1997, the Company entered into a
settlement agreement with Mr. Kedersha, whereby the Company cancelled such
options and issued to Mr. Kedersha 22,500 shares of Common Stock.
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D. In December 1996, the Company granted ten year options to acquire
375,000 shares to Burton Dubbin, the son of Mr. Henry Dubbin and the Company's
former Vice President. The options have an exercise price of $1 11/16 per share
and vest upon the earlier to occur of the Company's achievement of certain
financial benchmarks, the five year anniversary of the issuance of the options
or a change of control (as defined). In August 1997, Mr. Burton Dubbin
terminated his employment with the Company and entered into a two-year
consulting agreement at a fee of $150,000 per annum, plus 125,000 shares of
Common Stock, of which 25,000 shares were immediately issuable and 5,000 shares
are issuable monthly (in an aggregate amount not to exceed 100,000 shares) for
the duration of Mr. Burton Dubbin's service with the Company. In addition, the
Company amended the terms of the options, making such options immediately
exercisable and extending the expiration date until August 2007.
E. In December 1996, the Company issued options to acquire 17,500 shares
of Common Stock to Frederick C. Veit, a consultant of the Company, in
consideration of past services. The options have an exercise price of $1.75 per
share and expire on December 1, 2001.
F. In January 1997, the Company issued warrants to acquire 200,000
shares of Common Stock to Gotham City Corporate Relations Group, Inc. ("Gotham
City") in consideration of public relations consulting services to be rendered
to the Company by Gotham City. Warrants to acquire 66,667 shares are exercisable
at $5.00 per share, warrants to acquire 66,667 shares are exercisable at $6.00
per share, and warrants to acquire 66,667 shares are exercisable at $7.00 per
share. All such warrants were to expire on January 1, 1998. In addition, the
Company had agreed to issue Gotham City 10,000 shares of Common Stock. On
February 21, 1997, the Company terminated its agreement with Gotham City, and no
warrants or shares of Common Stock were issued.
G. In April 1997, the Company agreed to issue 300,000 shares of common
stock to a private investor at a price of $.67 per share.
H. In April 1997, the Company issued options to acquire 20,000 shares of
Common Stock to Fred L. Singer, a director and Vice President of the Company.
The options are immediately exercisable and have an exercised price of $1.00 per
share. In January 1998, Mr. Singer exercised options to acquire 5,000 shares of
Common Stock. The remaining options expire on April 16, 1999.
I. In April 1997, L.M. Spencer & Associates, Inc. exercised options to
acquire 50,000 shares of Common Stock at $.50 per share. These options were
acquired from Accord.
J. In April and May 1997, the Company entered into three agreements for
financial consulting services. Under the first of these agreements, the Company
agreed to issue to a consultant 50,000 shares of Common Stock and options to
acquire an additional 200,000 shares at exercise prices of between $2.50 and
$4.25. The second agreement provides for the issuance to a consultant of 75,000
shares of Common Stock and options to acquire an additional 75,000 shares at
exercise prices of between $4.50 and $5.00. Under the third agreement, the
Company agreed to issue to a consultant 50,000 shares of Common Stock and
options to acquire an
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additional 250,000 shares at prices of between $2.00 and $4.75. Subsequent to
May 31, 1997, options for 110,250 shares, at prices ranging from $2.00 to $3.00
per share, have been exercised.
K. In May 1997, the Company issued 24,419 shares of Common Stock to
Kramer, Levin, Naftalis & Frankel, counsel of the Company, in consideration of
past services.
L. Effective May 31, 1997, the Company issued options to acquire 350,000
shares of Common Stock to Gary Danziger, a director and the Chief Operating
Officer of the Company. The options have an exercise price of $1.00 per share
and expire on October 1, 1998.
The issuance set forth above were issued pursuant to Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"), as transactions by an
issuer not involving any public offering, and, alternatively, in the case of
employee options, on a no-sale theory.
Sales of Equity Securities Pursuant to Regulation S
On January 29, 1997, the Company closed an offshore placement of
1,500,000 shares of Common Stock with gross proceeds of approximately $3.3
million and incurred expenses of approximately $1.5 million, leaving net
proceeds to the Company of approximately $1.8 million. Signature Equities
Agency, G.m.b.H. served as introducing agent in connection with such placement.
The placement was a private transaction not involving a public offering
and was exempt from the registration provisions of the Securities Act, pursuant
to Section 4(2) thereof, and pursuant to Regulation S promulgated under the
Securities Act.
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
The Company is engaged in the business of operating and managing
physical therapy care centers. The Company operates four facilities in New York
City acquired in October 1996 and July 1997.
In December 1996, the Company acquired four Long Island, New York based
physical therapy care centers. This acquisition was rescinded in March 1997.
In February 1997, the Company sold the assets and certain liabilities of
1st Coast Rehabilitation, Inc. and 1st Coast Physical Therapy Inc. ("1st
Coast"), two physical therapy facilities and related rehabilitative medicine
practices in Jacksonville and Orange Park, Florida, together with a related
comprehensive outpatient rehabilitation facility (CORF) license. In
- 12 -
<PAGE>
connection with the sale of these facilities, the Company also sold a
wholly-owned financing subsidiary, effectively terminating its obligations under
a receivables funding facility. In April 1997, the Company disposed of its
physical therapy care center in St. Augustine, Florida, completing its exit from
the North Florida area in order to focus its operations in the Northeast.
Results of Operations
1996 Fiscal Year Compared to 1995 Fiscal Year
The Company acquired the assets and assumed certain liabilities of 1st
Coast in January 1995. Because of the timing of the 1st Coast acquisition, the
later acquisition of two CORF licenses in 1995 and amendments to the acquisition
agreements relating to 1st Coast in August 1995, a strict comparison of the
results of operations for the fiscal year ended May 31, 1996 ("Fiscal 1996") to
the results of operations for the fiscal year ended May 31, 1995 ("Fiscal 1995")
is not meaningful. The later year includes results for a 12 month period and the
former year includes results for only four months. Thus, the following analysis,
where there are comparisons, assume the difference in the time the Company has
pursued its operations during the periods.
During Fiscal 1996 the Company consolidated certain of its activities
and moved some of its operations to a new location with expanded facilities in
the Jacksonville, Florida area. The activities related to the move caused
disruption in the treatment of patients which had a minor impact on revenues
during Fiscal 1996.
Revenues for Fiscal 1996 were $4,663,792 compared to $2,652,989 for
Fiscal 1995, representing an increase of $2,010,903 or 75%. The increase is due
to the difference in the periods of operations covered as discussed above and an
increase in the number of patient visits which is a result of the differing
periods of operations and an actual improvement in the number of patient visits.
Expenses for Fiscal 1996 were $3,257,931 compared to $2,402,945 for
Fiscal 1995, representing an increase of $854,986 or 36%. Expenses increased for
the same reasons as revenues. Because of the difference in the operations for
the periods, a strict comparison of overall margins are not meaningful for the
two fiscal years, however the Company reduced its operating expenses from 91% of
net patient service income in Fiscal 1995 to 70% of net patient service income
in Fiscal 1996. Expenses include various compensation expenses, selling, general
and administrative expenses, interest expenses and depreciation and amortization
expenses. Compensation expense increased from $797,356 in Fiscal 1995 to
$1,910,452 in Fiscal 1996 because of changes in the compensation of current
employees, and undertaking the direct management of its business from outside
sources and hiring employees directly rather than using leased personnel.
Selling, general and administrative expenses declined from $1,501,538 to
$1,035,782 because of the closing of two locations during Fiscal 1996 and the
concomitant reduction of certain personnel, supply and rent expenses. Interest
expenses increased from $38,600 to $130,920 because of increased borrowings
under a number of credit arrangements for different purposes, the most
significant of which was a receivables funding arrangement from A-R Funding,
Ltd., which included a broker's fee for amounts borrowed.
- 13 -
<PAGE>
Net income for Fiscal 1996 was $1,081,753 compared to $145,606 for
Fiscal 1995. Income before income taxes for Fiscal 1996 was $140,581 compared to
$249,947 for Fiscal 1995. The Company reported income taxes of $346,770 for
Fiscal 1996 and $104,338 for Fiscal 1995.
1997 Fiscal Year Compared to 1996 Fiscal Year
Patient revenues decreased by 28.3% to $3,344,559 from $4,663,792 in the
fiscal year ended May 31, 1997 ("Fiscal 1997") compared with Fiscal 1996. The
decrease in revenues was attributable to the disposition in Fiscal 1997 of the
Company's North Florida facilities, as well as a fall off in revenues at these
facilities during that year, offset in part by revenues from the Company's New
York City clinics acquired in October 1996. Revenues from the four Long Island,
New York clinics acquired in December 1996, whose purchase was rescinded by the
Company effective February 28, 1997, are not included in the Company's revenues
for Fiscal 1997.
Total expenses increased by 99.8% from $3,257,931 for Fiscal 1996 to
$6,510,448 for Fiscal 1997. The increase in expenses was due to higher operation
expenses incurred in the New York City facilities and costs incurred in
connection with the disposition of the North Florida facilities. Total expenses
include costs of patient services, selling, general and administrative expenses,
losses on sales and rescission, interest expenses and depreciation and
amortization expenses. Costs of patient services as a percentage of patient
revenues increased from 41% in Fiscal 1996 to 56.1% in Fiscal 1997 because of
the Company's discontinuation of operations in North Florida and the higher
costs of doing business in New York. Selling, general and administrative
expenses increased to $3,283,010 in Fiscal 1997 from $1,035,782 in Fiscal 1996.
Selling, general and administrative expenses for Fiscal 1997 included allowances
and write-offs of uncollectible accounts receivable, compensation of executive
officers and travel expenses of executives between the Company's New York and
Florida facilities. The increase was also attributable to expenses related to
the improvement of the Company's financial controls and accounting system, and
increased legal and accounting expenses during Fiscal 1997 primarily due to the
transactional activities of the Company during the fiscal year, the settlement
of certain litigation matters and preparation of reports filed with the SEC. The
Company recognized interest costs of $403,724 in Fiscal 1997 as compared to
$130,920 in Fiscal 1996. Interest increased during Fiscal 1997 as a result of
higher interest rates on the Company's bank borrowings and increased financing
expenses associated with the receivables funding facility. During Fiscal 1997,
the Company also recognized a loss in connection with the sale of the North
Florida facilities and the rescission of the Long Island, New York facilities,
of $777,054. Total expenses as a percentage of income increased from 69.9% for
Fiscal 1996 to 194.7% for Fiscal 1997 as a result of these factors and the
decrease in revenues for these periods.
Income tax (benefit) expenses for Fiscal 1997 and Fiscal 1996 of
($546,677) and $346,770, respectively, are not representative of an effective
tax rate. For Fiscal 1997, the deferred income tax benefit has been reduced by
an increase in the allowance for the realization of deferred income tax assets
of $610,000, because, as of May 31, 1997, it is more likely than not that the
deferred tax assets will not be realized as they relate primarily to net
operating loss carryforwards and the Company may not generate sufficient future
taxable income for their
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<PAGE>
utilization. As of May 31, 1996, there were less net operating loss
carryforwards as compared to Fiscal 1997, and the Company utilized these net
operating losses as a reduction of deferred income tax payable. For Fiscal 1996,
the income tax expense has been reduced by the reversal of an overaccrual of
prior year's taxes of $230,655.
The above factors contributed to a net loss of $2,554,212 for Fiscal
1997, compared with net income of $1,081,753 for the Fiscal 1996.
Liquidity and Capital Resources
In the past, the Company has funded its capital requirements from
operating cash flow, loans against its accounts receivable, the sale of equity
securities and the issuance of equity securities in exchange for assets acquired
and services rendered. During Fiscal 1997, the Company undertook a number of
actions to consolidate its geographic focus. Together with other actions
undertaken following the close of the fiscal year, the Company hopes that these
actions will enable it to attract new investment capital, which the Company
believes will be necessary to sustain its ongoing operations and to facilitate
growth. The Company continues to explore opportunities to raise private equity
capital and, in conjunction therewith, to provide credit support for the
Company's operations and potential acquisitions. Although the Company has in the
past been and continues to be in discussions with potential investors, there can
be no assurance that its efforts to raise any substantial amount of private
capital will be successful. Any substantial private equity investment in the
Company will result in voting dilution of the Company's existing stockholders
and could also result in economic dilution. If the Company is unable to obtain
new capital, the Company will be unable to carry out its strategy of growth
through acquisitions and the long-term ability of the Company to continue its
operations may be in doubt.
Following the Company's acquisition of three New York City based
physical therapy care centers, together with a hospital contract for the
provision of physical therapy services, in October 1996, the Company determined
to shift its geographic focus from North Florida to the New York City area.
Consistent with this approach, in February 1997, the Company sold substantially
all of the assets and assigned certain liabilities of the physical therapy and
rehabilitation care centers and related medical practices in Jacksonville and
Orange Park, Florida, together with all of the shares of OT Receivables. (See
Item 1. Business. Sales of Florida Centers.) The purchase price consisted of
$200,000 in cash, with $100,000 paid at closing and a note in the amount of
$100,000 payable in two installments in April and May 1997. As collection of the
note is not probable, the Company has provided a reserve against the remaining
amount owed. In connection with the sale of OT Receivables, the Company pledged
as collateral to the lender under the receivables funding facility additional
accounts receivable in the amount of $700,000. The Company will be entitled to
receive 40% of any collections on the receivables transferred to the lender in
excess of the amount owed under the receivables funding facility. The Company
currently does not anticipate any such excess. In connection with the sale of
the two North Florida facilities, the Company terminated the employment
agreement with the facilities' medical director, received a return of 400,000
shares of the Company's Common Stock that had been issued in connection with the
acquisition of the
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<PAGE>
Company's North Florida facilities in 1995 and was relieved of its obligation to
issue an additional 145,000 shares of common stock incurred in connection with
such acquisition.
Continuing the divestiture of its Florida operations, the Company sold
its remaining North Florida facility located in St. Augustine, Florida in April
1997. The sale price for this facility was $25,000 in cash, with $15,000 paid at
the closing, $5,000 paid on April 26, 1997 and $5,000 paid on May 29, 1997.
Effective February 28, 1997, the Company rescinded its acquisition of
four Long Island, New York based physical therapy care centers, together with a
related management company. (See Item 1. Business. Acquisition and Recision.)
The acquisition of these businesses had been made in December 1996. In unwinding
the transaction, the former sellers returned all shares of Company common stock
and promissory notes issued to them in connection with the acquisition. In
addition, the former sellers agreed to pay the Company $448,935, representing
the cash portion of the purchase price in the original transaction and the net
amount expended by the Company on the Long Island facilities since the December
1996 acquisition. Of this amount, $50,000 was paid at closing and $25,000 was
paid in May 1997. The remaining amount was to be paid over an 18-month period.
In December 1997, the Company received $325,000 in full settlement of the
outstanding amount owed by the former sellers. Although the original acquisition
of the Long Island clinics was consistent with the Company's strategy of
focusing its operations in the New York area, the cash flow from these
facilities to the Company was insufficient to support the operations of these
facilities by the Company at that time. Assuming the availability of capital
and/or suitable financing, the Company intends to explore the possible
acquisition of other physical therapy facilities in the New York area. The
results of operations of the Long Island facilities have not been reflected in
the consolidated financial statements.
A significant portion of the revenues of the Company are for services
that are paid by third party payors, including insurance companies and Medicare.
As is typical in the health care industry, the Company receives payment after
services are rendered. Such payment is based, in part, on established cost
reimbursement principles and is subject to audit and retroactive adjustment.
While waiting for payment from third party payors, the Company is required to
fund its expenses from internal and, to the extent available, external financing
sources. The Company continues to hold approximately $1,900,000 of uncollected
receivables from the Florida operations. The Company has written off the entire
amount, based upon the Company's assessment of the probability of collection in
light of current circumstances.
In April 1997, the Company agreed to issue 300,000 shares of Common
Stock to a private investor at a price of $.67 per share. Proceeds of the sale
of the shares have been used for working capital. Also, in April and May 1997,
the Company entered into three agreements for financial consulting services.
Under the first of these agreements, the Company agreed to issue to a consultant
50,000 shares of Common Stock and options to acquire an additional 200,000
shares at exercise prices of between $2.50 and $4.25. The second agreement
provides for the issuance to a consultant of 75,000 shares of Common Stock and
options to acquire an additional 75,000 shares at exercise prices of between
$4.50 and $5.00. Under the third agreement, the Company agreed to issue to a
consultant 50,000 shares of Common Stock and
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<PAGE>
options to acquire an additional 250,000 shares at prices of between $2.00 and
$4.75. Subsequent to May 31, 1997, options for 110,250 shares, at prices ranging
from $2.00 to $3.00 per share, have been exercised.
In September 1996, the Company entered into a loan agreement with a bank
for a line of credit of $200,000 and a term loan in the amount of $400,000. The
loan had interest at the lender's prime rate plus one percent and had a maturity
date of March 31, 1998. The line of credit and the term loan were collateralized
by the accounts receivable and fixed assets of the New York City physical
therapy care centers. The Company paid off the line of credit and term loans in
September 1997.
In March 1997, the Company purchased physical therapy equipment which
were subject to existing operating leases for an aggregate cost of $250,230. The
Company then sold the equipment and other fixed assets with a net book value of
$239,862 for $450,230 and leased such equipment and assets back for a period of
five years with monthly payments of $11,226. In August 1997, the Company sold
the equipment of the New York City physical therapy center acquired in July 1997
for $171,335 and leased it back for a period of five years with monthly payments
of $4,215.
In September 1997, the Company entered into an agreement to sell all of
its existing and future patient care receivables for the next two years. Under
the agreement, the purchaser will advance to the Company 75% of under 180-day,
eligible receivables (as defined). Upon each sale, the Company will pay a
discount equal to prime plus 5% per annum and, at the initial closing, an
origination fee of $17,457. The Company and Mr. Henry Dubbin guaranteed the
collection of these receivables. On September 10, 1997, the Company closed on
the first sale of eligible receivables of $775,867 for $547,304.
In May 1993, the Company acquired 50,000 tons of gold ore from Nevada
Minerals Corporation in exchange for the issuance of 1,350,000 shares of Common
Stock. The ore was appraised as having a value of $5,000,000. The Company
subsequently formed a wholly-owned subsidiary, Aurum, with the gold ore as its
only asset. In June 1995, the Company exchanged the stock of Aurum for 6,000,000
shares of common stock of Accord. The Company had the right to receive a royalty
of 12 1/2% of the net mining proceeds from the processing of the gold ore
transferred to Accord. The Company previously announced an intention to
write-down its investment in Accord as of the end of the fiscal quarter ended
February 28, 1997 because of the absence of current financial information for
Accord and management's inability to otherwise determine the value of the Accord
interest. The Company has subsequently received requested financial information
for Accord and an updated appraisal report which valued the gold ore at
$5,181,000. In November 1997, the Company returned the 6,000,000 shares of
common stock of Accord in exchange for 100% of Aurum. The Company intends to
continue to pursue possibilities of realizing value on the gold ore interest,
although there can be no assurance that it will be successful in doing so.
Forward Looking Statements
Certain statements in this report set forth management's intentions,
plans, beliefs, expectations or predictions of the future based on current facts
and analyses. Actual results may
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<PAGE>
differ materially from those indicated in such statements. Additional
information on factors that may affect the business and financial results of the
Company can be found in the other filings of the Company with the Securities and
Exchange Commission.
Item 7. Financial Statements
The financial statements and information required by Item 7 are included
in the Index shown at Item 13.
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
(a) Puritz & Weintraub served as the independent auditors of the Company
for the fiscal years ended May 31, 1993 and 1994 and until September 6, 1995. On
September 6, 1995, Puritz & Weintraub resigned their engagement upon
consultation with the Company because it was determined that the best interest
of the Company would be served by retaining BDO Seidman, LLP. The decision to
change auditors was approved by the Company's Board of Directors. There were no
disagreements between the Company and Puritz & Weintraub on any matters of
accounting principles or practices, financial statement disclosure or auditing
scope or procedures.
(b) BDO Seidman, LLP ("BDO") served as the independent auditors of the
Company for the period from September 6, 1995 until January 4, 1996. During its
term of engagement, BDO advised the Company of its need to significantly expand
its audit of the cost and carrying values of the gold ore property, which had
been acquired by the Company in May 1993 in exchange for a controlling interest
in the Company, a portion of which shares were subject to an immediately
exercisable option by another stockholder of the Company. Specifically, BDO
requested a current, independent appraisal of the gold ore property and
documentary evidence of the cost of the property to its prior owner. The Company
terminated BDO because, although an appraisal from a qualified, licensed
appraiser and other information was provided, the Company was unable to provide
the type and level of appraisal or the documentary evidence demanded by BDO. The
gold ore property had been transferred to a wholly-owned subsidiary which in
turn was sold to Accord on June 21, 1995 for 6,000,000 shares of its common
stock, representing approximately 30% of the outstanding common stock of Accord.
Additionally, Accord lent the Company $100,000, which was collateralized and
guaranteed by a principal stockholder of the Company, and received two-year
options to acquire 50,000 shares of Common Stock at an exercise price equal to
the lesser of $2.00 per share or 50% of the quoted market price. Because BDO was
terminated as auditors of the Company, it did not complete certain procedures
related to the gold ore property, the result of which could have materially
impacted the fairness or reliability of the financial statements for the year
ended May 31, 1996 (the period covered by BDO's incomplete engagement) and for
the years ended May 31, 1994 and 1993 (with which BDO has no association). The
Company permitted BDO to respond to the inquiries of Simon Krowitz Bolin &
Associates, P.A. concerning the gold ore property. The decision to change
auditors was approved by the Company's Board of Directors.
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<PAGE>
(c) Simon Krowitz Bolin & Associates, P.A. ("Simon Krowitz") served as
the independent auditors from January 4, 1996 to April 29, 1997 and as the
independent auditors of the Company for the fiscal year ended May 31, 1996.
Effective April 29, 1997, Simon Krowitz resigned as the Company's independent
auditors. The report of Simon Krowitz on the Company's financial statements for
the fiscal year ended May 31, 1996 contained no adverse opinion or disclaimer of
opinion and was not qualified or modified as to uncertainty, audit scope or
accounting principle. In connection with the audit of the Company's financial
statements for the fiscal year ended May 31, 1996 and through April 29, 1997,
there were no disagreements between the Company and Simon Krowitz on any matters
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure.
(d) Effective June 6, 1997, the Company appointed Most Horowitz &
Company, LLP, as its independent auditors.
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
The directors and executive officers of the Company and their positions
at January 14, 1998 were as follows:
Name Age Position
---- --- --------
Henry Dubbin 82 President and Director
Gary Danziger 58 Chief Operating Officer, Vice
President and Director
Fred L. Singer 64 Vice President and Director
HENRY DUBBIN has been President of the Company since April 1997 and a
director of the Company since May 1993. From May 1993 to April 1997, Mr. Henry
Dubbin served as Vice Chairman of the Board and Vice President of the Company.
Mr. Henry Dubbin currently is the President of Nevada Minerals Corporation. From
1955 to 1992, Mr. Henry Dubbin worked with Canaveral International, Inc., a
diversified public company, from which he retired after being Chairman of the
Board of the Company.
GARY DANZIGER has served as Chief Operating Officer and Vice President
of the Company since April 1997 and as a member of the Board of Directors since
July 1997. From 1979 to 1996 Mr. Danziger practiced and administered various
physical therapy centers. From 1994 to 1996, Mr. Danziger operated and managed
srthopedic & Sports Therapy Services of Queens, L.P., Parkside of Queens, Inc.
and PTSR, Inc.
FRED L. SINGER has served as a member of the Board of Directors since
April 1997 and as Vice President of the Company since August 1997. Since 1963,
Mr. Singer has served as director, producer and cinematographer for Coronado
Productions, a/k/a Coronado Studios, a video production company.
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<PAGE>
Burton Dubbin, the son of Mr. Henry Dubbin, resigned as Vice President
of the Company in August 1997. Mr. Burton Dubbin was Vice President of the
Company from April 1997.
On April 16, 1997, Michael J. Gerber resigned his various positions with
the Company. Mr. Gerber was President and a director of the Company from
September 1995 and was Secretary of the Company from August 1996.
William Kedersha resigned as a director of the Company in March 1997 and
as the Chief Executive Officer in April 1997. Mr. Kedersha served as Chief
Executive Officer and a director of the Company from September 1996 and as a
consultant to the Company from March 1996.
On August 29, 1996, Irwin Bosh Stack resigned his various positions with
the Company. Mr. Stack was the Chairman of the Board, Secretary and a director
of the Company from its incorporation in May 1986 until August 1996, and Chief
Operating Officer of the Company from May 1993 until August 1996.
Directors may be elected by the stockholders at an annual meeting or a
special meeting called for that purpose (or in the case of a vacancy, are
appointed by the directors then in office) to serve until the next annual
meeting, until their successors are elected and qualified or until their removal
or resignation. Officers serve at the discretion of the Board of Directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities and Exchange Act of 1934, as amended
(the "Exchange Act"), requires the Company's officers, directors and persons who
beneficially own more than 10% of a registered class of the Company's equity
securities ("10% stockholders") to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Officers, directors and
10% stockholders also are required to furnish the Company with copies of all
Section 16(a) forms they file. Based solely on its review of the copies of such
forms furnished to it, during the past fiscal year, the Company is of the belief
that all such reports were filed on a timely basis, except as follows: Mr. Henry
Dubbin did not file a Form 4 on a timely basis to report his disposition of
shares of Common Stock of the Company, and Mr. Singer did not file a Form 3 and
a Form 4 on a timely basis to report his appointment as a director of the
Company and his acquisition of shares of Common Stock.
Item 10. Executive Compensation
The Summary Compensation Table below sets forth certain information
concerning the annual and long-term compensation for services in all capacities
to the Company for the 1997, 1996 and 1995 fiscal years, of those persons who
were the Chief Executive Officer during fiscal 1997 and other most highly
compensated executive officers of the Company who earned over $100,000 during
the last three fiscal years.
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<PAGE>
<TABLE>
============================================================================================================
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
Annual Long-Term
Compensation Compensation
--------------------------------------------------------------
Other Common
Annual Restricted Stock
Fiscal Compen- Stock Underlying
Name and Principal Position Year Salary sation Award(s) Options
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Henry Dubbin 1995 -0- -0- -0- 250,000
President 1996 -0- -0- -0- -0-
1997 $15,414 -0- -0- -0-
- ------------------------------------------------------------------------------------------------------------
Irwin Bosh Stack 1995 $35,000 -0- -0- 250,000
Chairman of the Board, Chief 1996 -0- -0- -0- -0-
Operating Officer and Secretary(1) 1997 -0- -0- -0- -0-
- ------------------------------------------------------------------------------------------------------------
William Kedersha 1997 $76,192 -0- $55,547 375,000
Chief Executive Officers(2)
- ------------------------------------------------------------------------------------------------------------
Michael J. Gerber 1996 -0- -0- -0- 55,000
President(3) 1997 -0- -0- -0- -0-
- ------------------------------------------------------------------------------------------------------------
Gary Danziger(4) 1997 $120,641 $100,000 -0- 350,000
Chief Operating Officer
- ------------------------------------------------------------------------------------------------------------
Burton Dubbin(5) 1997 -0- -0- -0- 375,000
Vice President
============================================================================================================
</TABLE>
(1) Mr. Stack resigned all of his positions with the Company on August 29,
1996, and options to acquire 250,000 shares of Common Stock expired upon
his resignation.
(2) Mr. Kedersha resigned all of his positions with the Company effective April
30, 1997. Includes the market value, as of May 30, 1997, of 22,500 shares
of restricted stock issued to Mr. Kedersha pursuant to his settlement
agreement with the Company and options to acquire 375,000 shares of Common
Stock which were cancelled as of May 1, 1997.
(3) Mr. Gerber resigned all of his positions with the Company on April 16,
1997. Options to acquire 5,000 shares of Common Stock expired on September
7, 1997, and the remaining options to acquire 50,000 shares of Common Stock
expired upon Mr. Gerber's resignation in April 1997.
(4) Includes deferred compensation of $100,000 as of May 31, 1997, pursuant to
Mr. Danziger's amended employment agreement with the Company.
(5) Mr. Burton Dubbin resigned as Vice President of the Company on August 29,
1997.
The following tables set forth certain information concerning stock
option grants made during the last fiscal year to the named executive officers
and the fiscal year-end value of such options.
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<PAGE>
<TABLE>
==========================================================================================================
OPTION GRANTS IN LAST FISCAL YEAR
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
Number of Percent of
Securities Total Options
Underlying Granted to Exercise
Name Options Employees Price Expiration Date
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gary Danziger 350,000 32% $1.00 October 1, 1998
- ----------------------------------------------------------------------------------------------------------
Burton Dubbin 375,000 34% $1.69 August 31, 2007
- ----------------------------------------------------------------------------------------------------------
William Kedersha 375,000 34% $1.69 May 1, 1997
==========================================================================================================
</TABLE>
<TABLE>
=================================================================================================================
AGGREGATED OPTIONS EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTIONS VALUES
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
Value of Unexercised In-
Shares Acquired on Value # of Unexercised Options the-Money Options at Fiscal
Exercise Realized at Fiscal Year End Year End
- ------------------------------------------ -------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Henry Dubbin 0 0 $0 250,000 0 $121,094 $0
- -----------------------------------------------------------------------------------------------------------------
Michael J. Gerber 0 0 $0 5,000 0 $4,122 $0
- -----------------------------------------------------------------------------------------------------------------
Gary Danziger 0 0 $0 350,000 0 $519,531 $0
- -----------------------------------------------------------------------------------------------------------------
Burton Dubbin 0 0 $0 0 375,000 $0 $297,891
=================================================================================================================
</TABLE>
(1) Value is calculated on the basis of the difference between the option
exercise price and the average of the bid and asked prices for the
Common Stock at May 30, 1997 as quoted on the over-the-counter market,
multiplied by the number of shares underlying the option.
Employment Agreements
The Company has an employment agreement with Henry Dubbin, as amended
September 1997, expiring June 1998 and providing for a salary of $50,000 per
year. For fiscal 1994, salary due Mr. Dubbin in the amount of $54,375 was
converted into a note, which was subsequently cancelled by Mr. Dubbin. Mr.
Dubbin waived his salary for the 1995 and 1996 fiscal years.
Gary Danziger has a three-year employment agreement with the Company, as
amended in July 1997, expiring in October 1999 which provides for (i) an annual
salary of $260,000, (ii) deferred compensation for the year ended May 31, 1997
of either $100,000 or 50,000 shares, (iii) incentive bonuses of up to $30,000
per quarter, (iv) options to acquire 350,000 shares of Common Stock, exercisable
at $1.00 per share until October 1, 1998, (v) a loan facility of $350,000,
payable in three years from the date of borrowing at interest of 7% per annum
and (vi) severance equal to 200% or 100% of annual salary if terminated during
twelve months ended September 30, 1998 or 1999, respectively.
- 22 -
<PAGE>
The Company had an employment agreement with William Kedersha, effective
as of December 3, 1996. Under the agreement, Mr. Kedersha received an annual
salary of $150,000 and incentive bonuses. In addition, the agreement granted Mr.
Kedersha ten year options to purchase 375,000 shares of Common Stock at a per
share exercise price equal to $1 11/16. In September 1997, the Company issued
22,500 shares of Common Stock to Mr. Kedersha as part of a settlement agreement
and, as of May 31, 1997, recorded the shares of Common Stock at $29,531.
The Company had an employment agreement with Irwin Bosh Stack, the
Company's former Chief Executive Officer, providing for a salary of $85,000 per
year. For fiscal 1994, salary due Mr. Stack in the amount of $63,500 was
converted into a note, which was subsequently cancelled by Mr. Stack. Mr. Stack
took a reduced salary of $35,000 for the 1995 fiscal year and waived his salary
for the 1996 fiscal year. Mr. Stack resigned all positions with the Company on
August 29, 1996.
In January 1995, in consideration of past services, the Company granted
to each of Messrs. Stack and Henry Dubbin options to acquire 250,000 shares of
Common Stock, exercisable at $2.00 per share until January 1, 1999. Options
granted to Mr. Stack expired upon his resignation as an officer and director of
the Company in August 1996.
1994 Performance Equity Plan
In February 1994, the Company adopted the 1994 Performance Equity Plan
("1994 Plan") covering 600,000 shares of the Company's Common Stock pursuant to
which officers, directors, key employees and consultants of the Company are
eligible to receive incentive or non-qualified stock options, stock appreciation
rights, restricted stock awards, deferred stock, stock reload options and other
stock based awards. The 1994 Plan will terminate at such time no further awards
may be granted under the plan and awards granted are no longer outstanding,
provided that incentive options may be granted only until February 16, 2004. The
1994 Plan is administered by the Board of Directors, which determines the
selection of participants, allotment of shares, price, and other conditions of
purchase of awards and administration of the 1994 Plan.
As of January 15, 1998, no options under the 1994 Plan were outstanding.
Non-Plan Options
As of January 14, 1997, the Company has outstanding non-plan options to
purchase an aggregate of 1,532,500 shares of Common Stock. The outstanding
options granted to current and former officers and directors of the Company are
as set forth below.
Number of
Name Option Shares Exercise Price Expiration Date
- ---- ------------- -------------- ---------------
Gary Danziger 350,000 $1.00 October 1, 1998
Burton Dubbin 375,000 $1.69 August 31, 2007
Henry Dubbin 250,000 $2.00 January 1, 1999
Fred L. Singer 15,000 $1.00 April 16, 1999
- 23 -
<PAGE>
Expenses and Meetings
All officers and directors are reimbursed for any expenses incurred on
behalf of the Company. Directors, other than Company officers, are reimbursed
for expenses pertaining to attendance at meetings of the Company's Board of
Directors, including travel, lodging and meals.
Indemnification of Officers and Directors
Under the Bylaws of the Company, officers and directors of the Company
and former officers and directors are entitled to indemnification from the
Company to the full extent permitted by law. The Company's Bylaws and the
Delaware General Corporation Act generally provide for such indemnification for
claims arising out of the acts or omissions of Company directors and officers
(and certain other persons) in their capacity as such, undertaken in good faith
and in a manner reasonably believed to be in, or not opposed to, the best
interests of the Company and, with respect to any criminal action or
proceedings, had no reasonable cause to believe that such conduct was unlawful.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of January 14,
1998 with respect to (i) those persons known to the Company to beneficially own
more than 5% of the Company's Common Stock, (ii) each director of the Company,
(iii) each executive officer whose compensation exceeded $100,000 in the fiscal
year ended May 31, 1997, and (iv) all directors and executive officers of the
Company as a group. The information is determined in accordance with Rule 13d-3
promulgated under the Securities Exchange Act. Except as indicated below, the
stockholders listed possess sole voting and investment power with respect to
their shares.
Amount and Nature of Percent
Beneficial Owner Beneficial Ownership of Class
- ---------------- -------------------- --------
Gary Danziger(1) 350,000 7.3%
1 Crooked Mile Road
West Port, CT 06880
Burton Dubbin(2) 420,000 7.8%
21394 Marina Cove Circle, Unit H11
North Miami Beach, FL 33180
Henry Dubbin(3) 978,375 21.0%
10155 Collins Avenue, Suite 607
Bar Harbor, FL 33154
- 24 -
<PAGE>
William Kedersha 22,500 *
2 Gannett Drive, Suite 215
White Plains, NY 10604
Nevada Minerals Corporation 728,375 16.5%
10155 Collins Avenue, Suite 607
Bar Harbor, FL 33154
Fred L. Singer(4) 20,000 *
9240 West Bay Harbor Dr., Apt. 3-C
Bay Harbor Islands, FL 33154
Irene Stack(5) 684,391 15.5%
P.O. Box 4851
Hialeah, FL 33014
All officers and directors as a group 1,348,375 26.8%
(3 persons)(6)
- -------------------------------
* Less than 1%.
(1) Consists of 350,000 shares of Common Stock subject to currently exercisable
options.
(2) Includes 375,000 shares of Common Stock subject to currently exercisable
options.
(3) Includes (i) 728,375 shares of Common Stock that Mr. Dubbin beneficially
owns through Nevada Minerals Corporation, a corporation of which he is the
majority stockholder and president, and (ii) 250,000 shares of Common Stock
subject to currently exercisable options.
(4) Includes 15,000 shares of Common Stock subject to currently exercisable
options.
(5) Includes 465,625 shares of Common Stock that Mrs. Stack beneficially owns
through her wholly owned corporation, FYM, Inc.
(6) Includes 615,000 shares of Common Stock subject to currently exercisable
options and 728,375 of Common Stock held by Nevada Minerals Corporation.
Change in Control
- 25 -
<PAGE>
In September 1997, the Company entered into a letter of intent to
acquire certain companies controlled directly or indirectly by Pierce Neuman,
M.D. The assets of these companies consist primarily of 21 medical practice and
MRI centers located in the greater New York metropolitan area. The letter of
intent was further amended in December 1997. Collectively, the centers had
revenues of approximately $65 million and estimated pre-tax profits in excess of
$19 million in calendar year 1997. Pursuant to the proposed transaction, which
shall take effect, if at all, upon execution of a definitive written agreement,
Dr. Neuman will own or control approximately 60% of the Company's outstanding
shares of Common Stock. There can be no assurance, however, that the Company
will successfully negotiate such definitive written agreement for the purchase
of these centers or meet its obligations of raising capital to complete the
acquisition or that all the other conditions to closing will be met by any of
the parties to the transaction.
Item 12. Certain Relationships and Related Transactions
On May 28, 1993, the Company acquired 50,000 tons of gold ore from
Nevada Minerals Corporation in exchange for the issuance of 1,350,000 shares of
restricted Common Stock. The gold ore was appraised as having a $5,000,000
value. On June 28, 1994, the Company formed a wholly owned subsidiary, Aurum
Mining Corporation, with the gold ore as its only asset.
On June 21, 1995, an agreement was signed between the Company and Accord
whereby 100% of the stock of Aurum was exchanged for 6,000,000 shares of common
stock of Accord. Accord was to pay the Company a royalty equal to 12.5% of the
net mining income for the productive life of the property.
On November 15, 1997, the Company returned the 6,000,000 shares of
common stock of Accord in exchange for 100% of the common stock of Aurum.
In November 1996, Mr. Fred L. Singer produced a marketing video for the
Company and received $25,000 in compensation.
On December 3, 1996, the Company granted an option to purchase 375,000
shares of Common Stock to Burton Dubbin, Mr. Henry Dubbin's son. The option is
exercisable at $1.69 per share until December 2006.
In August 1997, Mr. Burton Dubbin terminated his employment with the
Company and entered into a consulting agreement for a period of two years at a
fee of $150,000 per year, plus 125,000 shares of Common Stock, with 25,000
shares issued immediately and 5,000 shares issued monthly. In addition, the
option to acquire 375,000 shares of Common Stock has been amended to provide for
immediate exercisability and extension until August 2007.
- 26 -
<PAGE>
PART IV
Item 13. Exhibits, Financial Statements and Reports on Form S-K
The following documents are filed as part of this Annual Report on Form
10-KSB.
(a) Financial Statements: Page
Report of Independent Certified Public Accountants on
consolidated financial statements for the year ended
May 31, 1997.................................................. F-1
Report of Independent Certified Public Accountants on
consolidated financial statements for the year ended
May 31, 1996.................................................. F-2
Consolidated Balance Sheet as of May 31, 1997 and 1996.......... F-3
Consolidated Statement of Operations for the years ended
May 31, 1997 and 1996 .......................................... F-5
Consolidated Statement of Stockholders' Equity for the years
ended May 31, 1997 and 1996 .................................... F-6
Consolidated Statement of Cash Flows for the years ended
May 31, 1997 and 1996........................................... F-7
Notes to Consolidated Financial Statements...................... F-9
(b) Reports on Form 8-K.
An amendment to a Form 8-K, filed on February 27, 1997, was filed on
March 10, 1997 to include pro forma financial statements giving effect
to the disposition of the clinics in Jacksonville and Orange Park,
Florida and a press release announcing the Company's intention to
write-down its investment in Accord Futronics Corp.
A report on Form 8-K, dated March 19, 1997, was filed with the
Securities and Exchange Commission on April 3, 1997 disclosing the
rescission of the Company's acquisition of the four Long Island, New
York based physical therapy care centers.
A report on Form 8-K, dated April 29, 1997, was filed with the
Securities and Exchange Commission on May 6, 1997 disclosing the
resignation of Simon Krowitz Bolin & Associates, P.A. as the Company's
independent auditors.
(c) The following documents are filed as exhibits to this Annual Report on
Form 10-KSB.
3.1 Certificate of Incorporation, as amended. Incorporated by reference
from Registration Statement on Form S-18 - Commission File No.
33-8166B, August 20, 1986.
- 27 -
<PAGE>
3.2 Amendments to Certificate of Incorporation dated August 1, 1994.
Incorporated by reference from Exhibit 3.2 of the Annual Report on Form
10-KSB for the fiscal year ended May 31, 1995.
3.3 By-Laws. Incorporated by reference from Registration Statement on Form
S-18 - Commission File No. 33-8166B, August 20, 1986.
4.1 Form of Common Stock Certificate. Incorporated by reference from Form
10-KSB for the fiscal year ended May 31, 1994.
4.2 Option Agreement, dated June 21, 1995, between Registrant and Accord
Futronics Corporation. Incorporated by referenced from Exhibit 4.2 of
the Annual Report on Form 10-KSB for the fiscal year ended May 31,
1995.
4.3 Term Loan Agreement, dated September 30, 1996, between Oak Tree Medical
Management, Inc. and First Union National Bank. Incorporated by
referenced from Quarterly Report on Form 10-QSB for the fiscal quarter
ended August 31, 1996.
4.4 Security Agreement, dated September 30, 1996, between Oak Tree Medical
Management, Inc. and First Union National Bank. Incorporated by
referenced from Quarterly Report on Form 10-QSB for the fiscal quarter
ended August 31, 1996.
4.5 Promissory Note, dated September 30, 1996, between Oak Tree Medical
Management, Inc. and First Union National Bank. Incorporated by
referenced from Quarterly Report on Form 10-QSB for the fiscal quarter
ended August 31, 1996.
4.6 Unconditional Guaranty, dated September 30, 1996, among Registrant, Oak
Tree Medical Management, Inc. and First Union National Bank.
Incorporated by referenced from Quarterly Report on Form 10-QSB for the
fiscal quarter ended August 31, 1996.
4.7* Purchase Agreement, dated July 23, 1997, between Oak Tree Medical
Practice, P.C. and PFS VI, Inc.
10.1 Form of 1994 Equity Performance Plan. Incorporated by reference from
Information Statement dated July 11, 1994.
10.2 Form of Employment Agreement with Mr. Irwin Bosh Stock. Incorporated by
reference from Form 10-KSB for the Fiscal Year Ended May 31, 1994.
10.3 Form of Employment Agreement with Mr. Henry Dubbin. Incorporated by
reference from Form 10-KSB for the Fiscal Year Ended May 31, 1994.
10.4 Form of Acquisition Agreement between Registrant and 1st Coast Physical
Medicine Associates, Inc. Incorporated by reference from Form 8-K,
filed January 1995.
- 28 -
<PAGE>
10.5 Amended Oak Tree Medical Systems, Inc. Extension Agreement for Acquisition
by Acorn I, Inc. from 1st Coast Physical Medicine Associates Inc. of 1st
Coast Rehabilitation Inc. and 1st Coast Physical Therapy Inc. Incorporated
by reference from Form 10-KSB filed for the fiscal year ended May 31, 1995.
10.6 Employment Agreement between Registrant and Dr. Ronald W. Dennie.
Incorporated by reference from Form 10-KSB filed for the fiscal year ended
May 31, 1995.
10.7 Form of purchase agreement between Registrant and Cassandra Armstrong and
Martha Nugent. Incorporated by reference from Form 10-KSB filed for the
fiscal year ended May 31, 1995.
10.8 Form of purchase agreement between Registrant and Vladimir Kavchenko.
Incorporated by reference from Form 10-KSB filed for the fiscal year ended
May 31, 1995.
10.9 Agreement of Sale, dated October 1, 1996, among Oak Tree Medical
Management, Inc. and Orthopedic & Sports Therapy Services of Queens, L.P.
and Parkside of Queens, Inc. Incorporated by reference from Form 10-QSB
filed for the fiscal quarter ended August 31, 1996.
10.10 Agreement of Sale, dated October 1, 1996, between New Medical Practice,
P.C. and Parkside Physical Therapy Services, P.C. Incorporated by
reference from Form 10- QSB filed for the fiscal quarter ended August 31,
1996.
10.11 Agreement of Sale, dated October 1, 1996, among Oak Tree Medical
Management, Inc. Gary Danziger and PTSR, Inc. Incorporated by reference
from Form 10-QSB filed for the fiscal quarter ended August 31, 1996.
10.12* Employment Agreement, dated as of October 1, 1996, between New Medical
Practice, P.C. and Gary Danziger.
10.13 Executive Employment Agreement, dated as of December 3, 1996, between
Registrant and William Kedersha. Incorporated by reference from Form
10-QSB filed for the fiscal quarter ended November 30, 1996.
10.14 Stock Option Agreement, dated as of December 3, 1996, between Registrant
and Burton Dubbin. Incorporated by reference from Form 10-QSB filed for
the fiscal quarter ended November 30, 1996.
10.15 Purchase Agreement, dated as of February 6, 1997, among Registrant, Acorn
CORF I, Inc., Riverside CORF, Inc. and MB Data Corporation. Incorporated
by reference from Form 8-K filed on February 27, 1997.
10.16 Letter Agreement of Rescission, dated March 19, 1997, from Oak Tree
Medical Management, Inc. to James O'Neill, Mark Gentile and Maple Health
Inc. Incorporated by reference from Form 8-K filed on April 3, 1997.
- 29 -
<PAGE>
10.17* Agreement of Sale, dated July 16, 1997, between Oak Tree Medical
Practice, P.C. and Peter B. Saadeh, M.D.
10.18* Consulting Agreement, dated as of August 29, 1997, between Registrant
and Burton Dubbin.
16.1 Letter from Simon Krowitz Bolin & Associates, P.A., dated May 6, 1997,
addressed to the Securities and Exchange Commission. Incorporated by
reference from Form 8-K, filed May 6, 1997.
22.1 Subsidiaries:
Acorn CORF, Inc. Florida
Acorn CORF I, Inc. Nevada
Aurum Mining Corporation Nevada
1st Coast Rehabilitation, Inc. Florida
Oak Tree Financial Services, Inc. Florida
Oak Tree Medical Management, Inc. New York
Riverside CORF, Inc. Florida
27.1* Financial Data Schedule.
- -------------------------------
* Filed herewith.
- 30 -
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
AND SUBSIDIARIES
---------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1997 AND 1996
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1997 AND 1996
INDEX
INDEPENDENT AUDITORS' REPORT - Year ended May 31, 1997 F-1
INDEPENDENT AUDITORS' REPORT - Year ended May 31, 1996 F-2
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET F-3
CONSOLIDATED STATEMENT OF OPERATIONS F-5
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY F-6
CONSOLIDATED STATEMENT OF CASH FLOWS F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9
<PAGE>
Board of Directors
Oak Tree Medical Systems, Inc.
Flushing, New York
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheet of Oak Tree
Medical Systems, Inc. and Subsidiaries as of May 31, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Oak Tree Medical Systems, Inc. and Subsidiaries as of May 31, 1997, and the
consolidated results of its operations and its consolidated cash flows for the
year then ended in conformity with generally accepted accounting principles.
/S/ MOST HOROWITZ & COMPANY, LLPs
New York, New York
November 21, 1997 (December 31, 1997,
as to Notes 13 and 14)
<PAGE>
Report of Independent Certified Public Accountants
S
Oak Tree Medical Systems, Inc.
Hialeah, Florida
We have audited the accompanying restated consolidated balance sheet of Oak Tree
Medical Systems Inc. as of May 31, 1996, and the related restated consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. Theses financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Oak Tree Medical
Systems, Inc. as of May 31, 1996, and the results of its operations and its cash
flows for the year then ended, in conformity with generally accepted accounting
principles
/s/ Simon, Krowitz. Bolin and Associates, P.A.
August 13, 1996
August 29, 1996 as to Note 12
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MAY 31, 1997 AND 1996
ASSETS
1997 1996
---------- -----------
CURRENT ASSETS
Cash (Note 17) $ 125,919 $ 292,315
Patient care receivables (net of
allowance for contractual allowances
and doubtful accounts of $860,123
in 1997 and $1,486,270 in 1996)
(Notes 4, 6 and 9) 848,269 3,158,325
Other current assets 141,622 68,621
Note receivable - current
portion (Note 14) 264,401
----------
TOTAL CURRENT ASSETS 1,380,211 3,519,261
NOTE RECEIVABLE (Note 14) 109,534
INVESTMENT IN AFFILIATED COMPANY
(Note 7) 4,994,214 5,000,000
FIXED ASSETS (Notes 8 and 9) 507,163 394,145
OTHER ASSETS 80,666 58,657
GOODWILL (Note 3) 37,141 1,252,143
---------- -----------
TOTAL ASSETS $7,108,929 $10,224,206
========== ===========
(CONTINUED)
See notes to financial statements
F-3
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MAY 31, 1997 AND 1996
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
------------ -----------
CURRENT LIABILITIES
Note payable - bank (Note 9) $ 197,305
Accounts payable and accrued expenses 1,071,843 $ 920,363
Deferred compensation (Note 13) 100,000
Note payable (Note 6) 310,623
Current portion of long-term
debt (Note 10) 294,445 62,073
Current portion of capitalized lease
obligations (Note 11) 147,756 85,773
Deferred income taxes payable
(Note 12) 558,782
---------- -----------
TOTAL CURRENT LIABILITIES 1,811,349 1,937,614
LONG-TERM DEBT (NOTE 10) 92,667 128,481
CAPITALIZED LEASE OBLIGATIONS (Note 11) 311,587
OBLIGATION TO ISSUE SHARES OF COMMON
STOCK (Note 4) 349,765
---------- -----------
TOTAL LIABILITIES 2,215,603 2,415,860
---------- -----------
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY (Note 5)
Common stock, $.01 par value;
authorized: 25,000,000 shares;
issued and outstanding: 2,888,144
shares, as of May 31, 1997, and
2,619,869 shares as of May 31, 1996 28,881 26,199
Additional paid-in capital 9,772,472 9,766,573
Deficit ( 4,726,638) ( 1,984,426)
Less: prepaid consulting and stock
subscription receivable ( 181,389)
----------- ------------
TOTAL STOCKHOLDERS' EQUITY 4,893,326 7,808,346
---------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $7,108,929 $10,224,206
========== ===========
See notes to financial statements
F-4
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED MAY 31, 1997 AND 1996
1997 1996
---------- ----------
REVENUE
Patient services (Note 6) $3,344,559 $4,663,792
---------- ----------
EXPENSES
Costs of patient services 1,875,770 1,910,452
Selling, general and administrative 3,283,010 1,035,782
Depreciation and amortization 170,890 180,777
Interest - net 403,724 130,920
Losses on sales and rescission
(Notes 4 and 14) 777,054
---------- ----------
TOTAL EXPENSES 6,510,448 3,257,931
---------- ----------
(LOSS) INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY INCOME ( 3,165,889) 1,405,861
INCOME TAX BENEFIT (EXPENSE) (Note 12) 546,677 (346,770)
---------- ----------
(LOSS) INCOME BEFORE
EXTRAORDINARY INCOME ( 2,619,212) 1,059,091
CANCELLATION OF INDEBTEDNESS (Note 16) 65,000
---------- ----------
NET (LOSS) INCOME ($2,554,212) $1,081,753
========== ==========
(LOSS) INCOME PER COMMON SHARE
Before extraordinary income ($1.02) $.42
Extraordinary income .03
-----
NET (LOSS) INCOME PER COMMON SHARE ($ .99) $.42
===== ====
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 2,575,361 2,550,456
========= =========
See notes to financial statements
F-5
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 1997 AND 1996
<TABLE>
<CAPTION>
Prepaid
Common Stock Consulting
---------------------- Additional and Stock Total
Paid-in Subscription Stockholders'
Shares Amount Capital Deficit Receivable Equity
------ ------ ------- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance - May 31, 1995, as reported 2,046,969 $20,470 $8,035,371 ($2,927,491) $5,128,350
Restatements (Note 5) 467,500 4,675 1,206,013 ( 116,026) 1,094,662
---------- ------- ----------- ------------ ----------
Balance - May 31, 1995, as restated 2,514,469 25,145 9,241,384 ( 3,043,517) 6,223,012
Sales of common stock 82,200 822 405,178 406,000
Issuance of shares for services (Note 5) 23,200 232 120,011 120,243
Net income for year ending May 31, 1996 1,059,091 1,059,091
--------- -------- ---------- ----------- ----------
Balance - May 31, 1996, as restated 2,619,869 26,199 9,766,573 ( 1,984,426) 7,808,346
Sales of common stock 325,333 3,253 251,747 255,000
Issuance of common stock upon acquisition 54,237 542 399,458 400,000
Reacquisition of shares upon sale of Florida (400,000) (4,000) (1,068,000) ( 188,000) (1,260,000)
Issuance of common stock on acquisition
and rescission 14,286 143 99,857 100,000
Exercise of options 50,000 500 24,500 (25,000)
Issuance of shares for services 224,419 2,244 298,337 (170,750) 129,831
Amortization of prepaid consulting 14,361 14,361
Net loss for year ending May 31, 1997 ( 2,554,212) (2,554,212)
--------- ------- ----------- ----------- --------- -----------
Balance - May 31, 1997 2,888,144 $28,881 $9,772,472 ($4,726,638) ($181,389) $4,893,326
========= ======= ========== ========== ======== ===========
</TABLE>
See notes to financial statements
F-6
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED MAY 31, 1997 AND 1996
1997 1996
------ -----
OPERATING ACTIVITIES
Net (loss) income ($2,554,212) $1,059,091
Adjustments to reconcile net (loss)
income to net cash used in operating
activities
Bad debts 1,390,276
Losses on sales and rescission 777,054
Depreciation and amortization 464,943 180,777
Common stock issued for services 128,081 120,243
Deferred compensation 100,000
Equity in loss of investment 5,786
Capitalization of deferred
interest and other financing fees (662,500)
Deferred income taxes (558,782) 558,782
Cancellation of indebtedness (65,000)
Abandonment of leasehold
improvements 93,557
Increase (decrease) in cash from
Patient care receivables (1,780,591) (1,400,050)
Other current assets (68,001) 8,897
Other assets (4,531) 32,151
Accounts payable and
accrued expenses 762,245 (438,352)
Income taxes payable (280,338)
---------- ----------
NET CASH USED IN OPERATING ACTIVITIES (2,065,232) (65,242)
---------- ----------
INVESTING ACTIVITIES
Proceeds from sales of fixed assets 450,230
Proceeds from sales of Florida centers
(net of expenses of $13,451) 101,549
Collection of note receivable 85,000
Acquisition (net of notes payable of
$189,000, accounts payable of $65,000
and common stock issued of $400,000) (436,911)
Advances on rescission (412,506)
Purchases of fixed assets (net of
capitalized lease obligations of
$466,444 in 1997 and $80,223 in 1996) (275,293) (181,670)
Expenses of rescission (5,866)
Purchases of licenses (40,000)
Other 37,761
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (493,797) (183,909)
---------- ----------
(CONTINUED)
See notes to financial statements
F-7
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED MAY 31, 1997 AND 1996
(CONTINUED)
1997 1996
------ -----
FINANCING ACTIVITIES
Proceeds of notes payable - other $ 2,561,261 $ 44,975
Proceeds of long-term debt 450,000 310,623
Proceeds from issuance of common stock 241,750 421,000
Proceeds of note payable - bank 200,000
Payments of notes payable - other (614,979)
Payments of long-term debt (421,134) (355,208)
Payments of capitalized lease
obligation (21,570) (18,120)
Payments of note payable - bank (2,695)
----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 2,392,633 403,270
---------- --------
NET (DECREASE) INCREASE IN CASH (166,396) 154,119
CASH - Beginning of year 292,315 138,196
---------- --------
Cash - End of year $ 125,919 $292,315
========== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Interest paid $ 394,559 $130,928
----====== ========
See notes to financial statements
F-8
<PAGE>
OAK TREE MEDICAL SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Oak Tree Medical Systems, Inc. and Subsidiaries (Company) operate
physical therapy care centers in northeastern Florida (Note 4) and New York
(Note 3).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial Statements
The consolidated financial statements include the accounts of Oak Tree
Medical Systems, Inc. and its wholly-owned subsidiaries and Oak Tree Medical
Practice, P.C., a professional practice entity over which the Company exercises
significant influence and control. All material intercompany balances and
transactions have been eliminated.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Investment In Affiliated Company
Investment in affiliated Company was reported on the equity method.
Fixed Assets
Physical therapy equipment and office equipment and furniture were
stated at cost and are being depreciated on the straight-line method over the
estimated useful lives of the assets which are five years. Leasehold
improvements were stated at cost and were amortized over the terms of the leases
or the estimated useful lives of the assets which is seven years, whichever is
less.
Goodwill
Goodwill resulting from acquisitions of established physical therapy
care centers, represents costs in excess of net assets
F-9
<PAGE>
acquired and is being amortized on a straight-line basis over twenty years.
Annually, the Company evaluates goodwill for impairment by comparing estimated
discounted future cash flows to net book value.
Patient Service Revenue
Patient service revenue is reported at the estimated net realizable
amounts from patients, third-party payers and others for services rendered.
Stock Based Compensation
Stock based compensation to employees and nonemployees has been
recorded on the fair value method.
Income Taxes
Deferred income taxes have been provided for temporary differences
between consolidated financial statement and income tax reporting, resulting
primarily from the use of the cash basis method for income tax purposes and net
operating loss carryforwards.
Earnings Per Share
Earnings per share were computed based on the weighted average number
of common shares and common share equivalents outstanding during the year.
The Company adopted FASB Statement No. 128, "Earnings Per Share", which
changed the calculations and disclosures of earnings per share for the year
ended May 31, 1997 without a material effect.
3. ACQUISITION
On October 1, 1996, the Company acquired the operations of three
physical therapy care centers and a hospital service contract located primarily
in New York City for $900,000, payable: (a) $400,000 in cash, (b) $100,000 by
the assumption of a note payable (Note 10) and (c) the issuance of 54,237 shares
of common stock to a creditor of the seller. In addition, the seller will
receive 10,000 shares of common stock issuable on October 1, 1998, but no less
than $100,000.
In connection with the acquisition, the Company incurred expenses of
$101,911, including a finder's fee of $90,000 to a company in which the wife of
the former chief executive officer of the Company is an owner, and which was
agreed to prior to employment by the Company. The finder's fee was paid $25,000
in cash and the balance was due in a note payable due on January 15, 1998, with
interest at 12.5%, per annum (Note 16).
F-10
<PAGE>
In addition, the Company assumed three leases for physical therapy care
centers (Note 13).
The results of operations of the acquired centers have been included in
the consolidated statement of operations from October 1, 1996, the date of the
acquisition. The acquisition was recorded on the purchase method and the total
purchase price, including related costs (and net of the imputed interest of
$11,000 on the amount due to seller), was allocated to the fair values of the
assets acquired and the excess to goodwill, as follows:
Patient care receivables (net of
allowances for doubtful accounts) $ 750,000
Supplies 5,000
Physical therapy equipment 261,689
Deposits 35,800
Goodwill 38,422
----------
$1,090,911
==========
4. SALES OF FLORIDA CENTERS
On February 12, 1997, certain subsidiaries sold substantially all of
the assets and operations of the physical therapy care centers in Jacksonville
and Orange Park, Florida. In addition, the Company sold all the outstanding
shares of another subsidiary which held the receivables of the two centers, and
was the debtor under the receivables funding facility (Note 6).
In exchange for the assets and subsidiary sold, the Company received
$100,000 in cash and a note in the amount of $100,000 and the purchaser assumed
$86,150 of accounts payable and a note payable of $1,812,500. In exchange for
the consent of the lender of the patient care receivables funding facility (Note
6), the Company transferred to the lender $700,000 of additional patient care
receivables.
In addition, the Company reacquired 400,000 shares of common stock from
an employee, valued at $3.15, per share, and then retired the shares. The
Company was also released of an obligation to issue additional shares of common
stock.
In April 1997, the Company sold its physical therapy care center in St.
Augustine, Florida, completing its exit from Florida. The sale price was $25,000
in cash, of which $15,000 was paid at the closing, $5,000 on April 26, 1997 and
$5,000 on May 29, 1997.
F-11
<PAGE>
A summary of the aggregate loss on the sales of the Florida centers is
as follows:
Reacquisition of common stock $1,260,000
Purchase prices 225,000
Assumption of note payable 1,812,500
Cancellation of obligation to
issue shares of common stock 349,765
Assumption of accounts payable 86,150
Costs of assets sold ( 2,958,623)
Additional allowance for
doubtful patient care receivables ( 967,500)
Write-off of deferred interest and
other financing fees (Note 6) ( 386,458)
Allowance for collection of
note receivable ( 100,000)
Expenses of sales ( 13,451)
----------
Loss on sales ($ 692,617)
==========
5. COMMON STOCK
Prior Period Adjustments
The Company's consolidated financial statements have been restated as
of May 31, 1995 to reflect the issuance of 400,000 shares of common stock, with
a fair value of $1,072,000, issued in connection with the acquisition of a
Florida physical therapy care center acquired in January 1995, which had been
reported as issued during the year ended May 31, 1996.
The Company's consolidated financial statements as of May 31, 1995 and
1996 have also been restated to reflect the issuance of shares of common stock
in exchange for various services. These shares have been valued at their fair
values on their respective dates of issuance, as follows:
Years Ending
May 31, Shares Value
------------ ------ --------
1995 67,500 $138,688
1996 23,200 120,243
------ --------
90,700 $258,931
====== ========
The effect of the restatement was to decrease net income for the years
ended May 31, 1996 and 1995 by $72,146 ($.03, per share) and $116,026 ($.05, per
share), respectively, net of income taxes of $22,662 and $48,097, respectively.
F-12
<PAGE>
Exercise of Options
On April 9, 1997, options were exercised to acquire 50,000 shares of
common stock at $.50, per share, in exchange for a note receivable due on April
15, 1999, with interest at 8.5%, per annum. These options had been acquired from
Accord (Note 7).
Issuance of Common Stock
Through May 31, 1997, the Company issued an aggregate of 26,919 shares
of common stock in exchange for legal services. The shares were valued at an
average price of $3.66, per share.
On September 3, 1997, the Company entered into a settlement agreement
with its former chief executive officer and issued 22,500 shares of common stock
and, as of May 31, 1997, recorded the shares of common stock at $29,531.
Options
On December 31, 1996, in exchange for legal services, the Company
granted options to purchase 17,500 shares of common stock, exercisable at $1.75,
per share, through May 1, 2001.
Public Relations Consulting Agreements
In April and May 1997, the Company entered into three public relations
consulting agreements, two for a period of one year and the other through
December 31, 1997, for an aggregate compensation of: (a) 175,000 shares of
common stock for an aggregate purchase price of $1,750, (b) $3,000, per month,
for one year and (c) options to acquire 525,000 shares of common stock. The
options are exercisable at $2 to $5, per share, through December 31, 1998, as
extended. The shares were recorded at $.75 to $1.69, per share. The aggregate
consulting fees of $170,750 have been capitalized and are being amortized over
the terms of the agreements.
Subsequent to May 31, 1997, options for 110,250 shares, at prices
ranging from $2 to $3, per share, respectively, have been exercised.
Stock Option Plans
As of May 31, 1996, the Company terminated its 1986 stock option plan.
No options were granted under the plan.
The Company has a Performance Equity Plan (Plan) under which it may
grant incentive and non-qualified stock options, stock appreciation rights,
restricted stock awards, deferred stock, stock reload options and other stock
based awards to purchase up to 600,000 shares of common stock to officers,
directors, key employees and consultants. The Company may not grant any options
with a purchase price less than fair market value of common stock
F-13
<PAGE>
as of the date of the grant. Through May 31, 1997, the Company had not granted
any options under the Plan.
Reserved Shares
As of May 31, 1997, the Company has reserved the following shares of
common stock:
Plan 600,000
Options to consultants (a) 917,500
Options to directors/officers (b) 620,000
Options to former employee (c) 5,000
---------
2,142,500
=========
(a) exercisable from $1.69 to $5, per share, through December
2001
(b) exercisable from $1 to $2, per share, through April 1999
(c) exercisable at $1.66, per share, through September 1997
The value of all options issued by the Company has been assumed to be
immaterial.
6. PATIENT CARE RECEIVABLES
In December 1995, the Company entered into a borrowing agreement under
which the Company borrowed funds utilizing its patient care receivables as
collateral. The agreement required loan discounts of 1.5%, per advance, interest
of 1.5% on monthly outstanding balances and a fee of 2%, per advance.
In September 1996, the Company refinanced its patient care receivable
agreement, whereby approximately $2,613,000 of patient care receivables were
provided as collateral for a loan of $1,912,500. In the event that the lender
collects funds in excess of the original $1,912,500, such excess shall be
refunded to the Company, less collection charges. As collection of any amounts
is not probable, the Company has written-off these patient care receivables.
Upon closing, the Company paid interest and other financing fees of $662,500.
As of May 31, 1997 and 1996, patient care receivables included
approximately 13% and 37%, respectively, due from Medicare.
F-14
<PAGE>
7. INVESTMENT IN AFFILIATED COMPANY
As of May 31, 1997, investment in affiliated company consisted of:
Investment $5,000,000
Equity in loss ( 5,786)
----------
$4,994,214
==========
In June 1995, the Company exchanged 100% of the common stock of a
subsidiary, which only owned an interest in gold ore (which was previously
acquired for common stock of the Company, with a value of $5,000,000) for
6,000,000 shares of common stock of Accord Futronics Corp. (Accord),
approximately 30%, and Accord was to pay the Company a royalty of 12.5% of net
production income from processing the ore. No gain or loss was recognized on the
exchange.
On November 15, 1997, the Company returned the 6,000,000 shares of
common stock to Accord in exchange for 100% of the common stock of the
subsidiary. Accord had not yet commenced mining nor anticipated commencing in
the near future, and the Company desired to commence such mining or other
provision for the gold. No gain or loss was recognized on the exchange.
As of May 31, 1996, the latest date available, the unaudited
consolidated condensed financial statements of Accord were:
BALANCE SHEET
CASH, CASH EQUIVALENTS, AND
MARKETABLE SECURITIES $ 1,365,591
INVESTMENT IN GOLD RESERVES 42,875,000
OTHER ASSETS 1,115,122
-----------
TOTAL ASSETS $45,355,713
===========
LIABILITIES NONE
SHAREHOLDERS' EQUITY $45,355,713
-----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $45,355,713
===========
STATEMENT OF OPERATIONS
REVENUES $195,007
EXPENSES ( 214,294)
--------
NET LOSS ($ 19,287)
========
F-15
<PAGE>
8. FIXED ASSETS
As of May 31, 1997 and 1996, fixed assets consisted of the following:
1997 1996
-------- --------
Physical therapy equipment $499,437 $334,435
Office equipment and furniture 40,258 166,870
Leasehold improvements 50,923
-------- --------
539,695 552,228
Less: accumulated depreciation and
amortization 32,532 158,083
-------- --------
$507,163 $394,145
======== ========
As of May 31, 1997, fixed assets included capitalized lease assets of
$514,632.
9. NOTE PAYABLE - BANK
On September 30, 1996, the Company entered into a loan agreement with a
bank for a line of credit of $200,000 and a term loan of $400,000 (Note 10). The
term loan is payable in equal monthly installments of $22,222, plus interest at
1% above the prime rate, per annum, through March 31, 1998. The term loan and
line of credit loan are collateralized by the accounts receivable, fixed assets,
etc. of the New York City physical therapy care centers. The proceeds of the
term loan were used in connection with the New York City acquisition (Note 3).
As of May 31, 1997, interest on the loans was 9.5%, per annum.
On September 10, 1997, the line of credit and term loans were paid-off
(Note 19).
F-16
<PAGE>
10. LONG-TERM DEBT
As of May 31, 1997 and 1996, long-term debt consisted of the following:
1997 1996
-------- --------
Note payable to bank (Note 9) $244,445
Due to officer (a) (Note 3) 92,667
Note payable assumed, paid in
November 1997, with interest
at 6.07%, per annum (Note 3) 50,000
Note payable to bank, with
interest at prime plus 1%, per
annum $155,579
Note payable, without interest 34,975
-------- --------
387,112 190,554
Less: current portion 294,445 62,073
-------- --------
$ 92,667 $128,481
======== ========
(a) Chief operating officer of the Company (Note 13).
11. CAPITALIZED LEASE OBLIGATIONS
In March 1997, the Company purchased primarily physical therapy
equipment which were subject to existing operating leases for an aggregate cost
of $250,230. This equipment and other fixed assets with a net book value of
$239,862 were then sold for $450,230 and leased back for a period of five years.
The leaseback has been accounted for as a capitalized lease. The loss of $39,862
realized on the sale and leaseback has been deferred and is being amortized over
the term of the lease.
Obligations under the capitalized leases and the related assets were
recorded at the lower of the present value of the minimum lease obligations or
the fair market value of the assets. The implicit interest rates on the capital
leases were approximately 11% to 17%, per annum.
F-17
<PAGE>
As of May 31, 1997, the future minimum annual lease obligations under
the capital leases were as follows:
Years Ended
May 31,
-----------
1998 $147,756
1999 132,677
2000 129,747
2001 125,405
2002 100,482
--------
Total minimum lease obligations 636,067
Less: amount representing interest 176,724
--------
Present value of minimum lease
obligations 459,343
Less: current portion of capitalized
lease obligations 147,756
--------
$311,587
========
12. INCOME TAXES
For the years ended May 31, 1997 and 1996, income tax benefit (expense)
consisted of the following:
1997 1996
-------- --------
Current: State ($ 12,105) $ 4,019
Reversal of prior
year's overaccrual 230,655
-------- --------
( 12,105) 234,674
-------- --------
Deferred: Federal 458,782 ( 463,782)
State 100,000 ( 95,000)
-------- --------
558,782 ( 558,782)
-------- --------
$546,677 ($324,108)
======== ========
F-18
<PAGE>
For the years ended May 31, 1997 and 1996, the tax effects of timing
differences which gave rise to deferred income taxes were as follows:
1997 1996
---------- -------
Net operating loss
carryforwards $ 100,000 $300,000
Cash basis 1,068,782 ( 918,782)
Less valuation allowance ( 610,000) 60,000
---------- ---------
$ 558,782 ($558,782)
========== =========
As of May 31, 1997 and 1996, the tax effects of the components of
deferred income tax were as follows:
1997 1996
-------- -------
Net operating loss carryforwards $600,000 $500,000
Cash basis 100,000 ( 968,782)
Less valuation allowance ( 700,000) ( 90,000)
-------- --------
None ($558,782)
======== ========
The following is a reconciliation of income taxes computed at the 34%
statutory rate to the provision for income taxes:
1997 1996
---------- --------
Tax at statutory rate $1,060,000 ($463,000)
State income tax 87,895 ( 50,981)
Reversal of prior year's
Federal overaccrual 194,674
Valuation allowance ( 610,000) 60,000
Other 8,782 ( 64,801)
---------- --------
$ 546,677 ($324,108)
========== ========
As of May 31, 1997, realization of the Company's deferred tax assets of
$700,000, resulting from the net operating loss carryforwards and temporary
differences, is not considered more likely than not, and accordingly, a
valuation allowance of $700,000 has been established.
As of May 31, 1997, the Company had net operating loss carryforwards of
approximately $1,800,000 to reduce future Federal taxable income, expiring
through May 31, 2012. As a result of a prior change in control in ownership of
the Company, utilization of approximately $225,000 of these net operating loss
carryforwards, expiring through May 31, 2006, are limited to approximately
$26,000, per year.
The Company's consolidated financial statements have been restated to
reflect the utilization of the income tax effect of net
F-19
<PAGE>
operating losses of $162,000 against deferred income taxes payable, as of May
31, 1996. The effect of this restatement was to increase net income for the year
ended May 31, 1996 by $162,000 ($.06, per share).
13. COMMITMENTS AND CONTINGENCIES
Leases
The Company is committed under noncancellable leases for centers and
office space through November 2003, requiring minimum rents, plus additional
rent for increases in real estate taxes and operating expenses.
As of May 31, 1997, the future minimum aggregate annual payments under
these leases were as follows:
Years Ending
May 31,
------------
1998 $ 321,801
1999 336,778
2000 349,702
2001 367,494
2002 362,536
Thereafter 256,655
----------
$1,994,966
==========
For the years ended May 31, 1997 and 1996, rent expense was $382,954
and $169,837, respectively.
Employment Agreement
The Company is committed under an employment agreement, as amended July
1997, to its chief operating officer through September 30, 1999, requiring: (1)
an annual salary of $260,000; (2) deferred compensation for the year ended May
31, 1997 of either $100,000 or 50,000 shares of common stock; (3) bonuses, as
defined, up to $30,000, per quarter; (4) options to purchase 350,000 shares of
common stock, exercisable at $1, per share, through October 1, 1998; (5) a loan
of $350,000, payable three years from the date of the loan, in cash or shares of
common stock, at $1, per share, with interest at 7%, per annum, payable
quarterly and (6) severance equal to 200% and 100% of annual salary if
termination, as defined, during the twelve months ended September 30, 1998 or
1999, respectively. The loan will be collateralized by the 50,000 shares of
common stock received and the option or shares acquired under the option.
F-20
<PAGE>
Litigation
On September 1, 1995, a former owner of a center filed a lawsuit
against a subsidiary (Note 4) asserting: (1) breach of contract for failure to
pay amounts due under management service contracts, (2) breach of contract by
improper termination of those contracts and (3) breach of a noncompete agreement
by the physician who was the former sole stockholder of the subsidiary and was
the Company's chief medical officer. Commencing April 30, 1994, and through May,
1995, the former owner provided management services for certain operations of
the subsidiary. In December 1997, the matter was settled without material effect
on the Company.
During the year ended May 31, 1996, management provided $100,000 for
legal costs and settlement, if any, and for the years ended May 31, 1997 and
1996, approximately $12,000 and $36,000, respectively, of costs were incurred.
A subsidiary (Note 4) had filed suit against a former
physician/employee to recover damages relating to the former employee's conduct
in attempting to wrongfully bill and collect in his individual capacity, for
medical services which he rendered while employed with the subsidiary. In
December 1996, the matter was settled without a material effect on the Company.
Subsequent to May 31, 1997, the Company and a former consultant settled
a matter requiring the Company to issue 22,000 (and, if a certain stock value is
not met, an additional 2,500) shares of common stock and pay $3,000 in cash. As
of May 31, 1997, the Company accrued $75,000, the estimated settlement and legal
fees.
In April 1996, a former patient commenced a malpractice claim against
the Company, certain subsidiaries and an employee. The claim was settled in
November 1996 and the Company's insurance company paid the settled amount.
In August 1997, the wife of a former chairman of the board of the
Company commenced an action, as a stockholder, against the Company alleging
unreasonable restraint on the transferability of certain shares of common stock
of the Company and for breach of fiduciary duty on the part of the Company's
chairman and is seeking unspecified damages and relief. Management, upon advise
of counsel, believes the matter is without merit and will result in no material
effect to the Company.
In October 1997, an action was commenced against the Company, certain
current and former directors, officers and consultants alleging, among other
things, breach of fiduciary duties and seeks, among other things, the recission
of the issuance of certain shares of common stock and related options to acquire
shares of common stock. Management does not believe this action will have any
material adverse effect on the Company.
Insurance
Upon the sales of the Company's physical therapy care centers in
Florida (Note 4), the Company has self-insured for medical malpractice
liabilities, if any, which may still arise from the Florida operations. Through
November 21, 1997, the Company has not been notified of any claims for
malpractice. The Company is unable to determine the effect, if any, of its
self-insurance.
F-21
<PAGE>
14. ACQUISITION AND RESCISSION
On December 11, 1996, the Company acquired certain assets of four
physical therapy care centers and a management company located in Long Island,
New York for an aggregate purchase price of $650,000 and 132,190 shares of
common stock of the Company, plus other consideration. In connection with the
acquisition, the Company incurred a finder's fee, equal to 10% of the purchase
price, to a related company (Note 3).
Effective February 28, 1997, the Company rescinded the acquisition and
the sellers returned all stock and notes originally issued to them. The payments
of the purchase price and the net revenues and expenses of these centers, for
the period from December 11, 1996 to February 28, 1997, were converted to a note
receivable of $448,935, including $15,000 for the purchase of 12,000 shares of
common stock. The note was receivable $50,000 at closing, $25,000 on May 5, 1997
and the balance in eighteen equal monthly installments, with interest at 10%,
per annum. In addition, the finder's fee was also cancelled.
In addition, the Company was required to pay a landlord $100,000, which
was settled by the issuance of 14,286 shares of common stock. Upon the
rescission, the Company received $21,429 from the seller as a repayment, and
such amount was included in the note receivable.
The results of operations of the Long Island centers from December 11,
1996 through February 28, 1997 have not been included in the consolidated
statement of operations.
The Company recognized a loss on the rescission of $84,437.
On December 11, 1997, the Company received $325,000 in full settlement
of the remaining amount of the note receivable.
15. RELATED PARTY TRANSACTIONS
On December 3, 1996, the Company granted an option to purchase 375,000
shares of common stock to an employee who was a relative of the chairman of the
board of directors. The option is exercisable at $1.69, per share, through
December 2006. The options were to become exercisable upon the earlier of: (1)
the Company meeting certain revenue and/or earnings criteria or (2) five years
and being an employee of the Company.
In August 1997, the above employee's employment terminated and the
Company entered into a consulting agreement for a period of two years at a fee
of $150,000, per year, plus 125,000 shares of common stock, issuable 25,000
shares immediately and 5,000 shares, per month, as long as the consultant has
not been terminated, as defined.
F-22
<PAGE>
In addition, the option agreement to purchase 375,000 shares of common
stock has been amended to provide for immediate exercisability and an extension
until August 2007.
16. FORGIVENESS OF INDEBTEDNESS
During the year ended December 31, 1997, the related party (Note 3)
forgave the balance due on the finder's fee of $65,000.
17. CONCENTRATION OF CASH
From time to time, the Company had cash in financial institutions in
excess of insured limits. In assessing its risk, the Company's policy is to
maintain funds only with reputable financial institutions.
18. RECLASSIFICATION
Certain 1996 amounts have been reclassified to conform to 1997
classifications.
19. SUBSEQUENT EVENTS
Acquisition
On July 16, 1997, the Company acquired an additional physical therapy
care center in New York City for a purchase price of $400,000, payable $100,000
in cash, which was paid at closing, and a note of $300,000 due in 18 quarterly
installments of $18,343, including interest at 8%, per annum, commencing
November 1, 1997. The note is collateralized by all the assets acquired. In
addition, the seller, a physician, has entered into a noncompete agreement for
four years. The purchase price may be reduced by $100,000, if the acquired
center does not attain certain billings.
In connection with the acquisition, the Company entered into a: (1)
lease for the center requiring minimum annual rents of $47,738 increasing to
$53,438 through August 2003, plus additional rent for increases in real estate
taxes, operating expenses, etc., (2) consulting agreement with the seller for a
six-month period and then on a month-to-month basis, at $150,000, per annum, and
(3) consulting agreement with the physical therapy care center administrator, a
relative of the seller, for a six-month period and then on a month-to-month
basis, at of $50,000, per annum.
Sale and Leasebacks
In August 1997, the Company sold the equipment acquired on July 16,
1997 for $171,335 and leased back the equipment for a period of five years
requiring equal monthly payments of $4,215.
F-23
<PAGE>
Financing Arrangement
In September 1997, the Company entered into an agreement to sell all
existing and future patient care receivables for a period of two years. Under
the agreement, the purchaser will advance 75% of under 180 day, eligible
receivables, as defined. Upon each sale, the Company will pay a discount equal
to prime plus 5%, per annum, and, at the initial closing, paid an origination
fee of $17,457. The Company has guaranteed the collection of these receivables.
On September 10, 1997, the Company closed on the initial sale of
accepted receivables of $775,867 and used proceeds of $547,304 to payoff the
notes payable - bank (Notes 9 and 10).
Sale of Common Stock (Unaudited)
On January 29, 1998, the company completed an offering for the sale of
1,500,000 shares of common stock for an aggregate purchase price of
approximately $3,300,000 and incurred expenses of approximately $1,500,000 in
connection with the offering.
F-24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Dated: February 2, 1998 OAK TREE MEDICAL SYSTEMS, INC.
By: /s/ HENRY DUBBIN
-------------------------
Henry Dubbin, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
/s/ HENRY DUBBIN President and Director February 2, 1998
- ----------------------------
Henry Dubbin
/s/ GARY DANZIGER Chief Operating Officer, February 2, 1998
- ----------------------------
Gary Danziger Vice President and Director
/s/ FRED L. SINGER Vice President and Director February 2, 1998
- ----------------------------
Fred L. Singer
PURCHASE AGREEMENT
This Agreement (the "Agreement") dated as of July 14, 1997, by and
between Oak Tree Medical Practice, P.C. with offices at 163-03 Horace Harding
Expressway, Flushing, NY 11365, (the "Provider"), and PFS VI, Inc., a Delaware
corporation with its offices located at 992 Old Eagle School Road, Suite 911,
Wayne PA 19087 ("Purchaser").
RECITALS
WHEREAS, Purchaser is in the business of providing working capital to
healthcare providers by purchasing the patient accounts receivable of such
providers; and
WHEREAS, the Provider has requested Purchaser to purchase certain of
its patient accounts receivable from time to time, upon the terms and conditions
set forth herein; and
WHEREAS, Purchaser is willing to purchase certain patient accounts
receivable offered by the Provider from time to time, upon the terms and
conditions set forth herein.
NOW THEREFORE, the parties hereto intending to be legally bound hereby,
agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01 Definitions.
Capitalized terms used herein shall have the following meanings:
(a) Advance. Seventy-five percent (75%).
(b) Assignment. The Bill of Sale and Assignment attached
hereto as Exhibit "A".
(c) Batch. A group of Eligible Receivables submitted by the
Provider to Purchaser for purchase.
(d) Business Day. Any day other than (i) a Saturday or Sunday,
or (ii) a day on which banking institutions in the
Commonwealth of Pennsylvania are authorized or obligated by
law or executive order to be closed.
(e) Certificate of Participation. The certificate set forth in
Exhibit "C" hereto, which represents the Provider's interest
in Purchased Receivables equal to 100% of the amounts
collected by Purchaser in excess of the Participation
Threshold Amount.
(f) Claims. Any patient account receivable presently owned or
hereafter acquired by assignment or otherwise, by the
Provider, in connection with the
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rendition of bona fide services and related tests, or the sale
or rental of equipment, pharmaceuticals, merchandise or
supplies to patients, in connection with medical care
prescribed by a licensed medical practitioner, for which the
Provider, as assignee of the patient or otherwise, is entitled
to reimbursement by law or under an agreement with a third
Party Obligor, together with all proceeds, accounts and
general intangibles related thereto, and all rights, remedies,
guaranties, and security interests and liens in respect of the
foregoing and purchased by Purchaser pursuant to the terms of
this Purchase Agreement.
(g) Closing Date. Initially, and such subsequent dates on
which purchases are made.
(h) Discount Fee. The amount determined by multiplying the
prime rate as announced by Nations Bank or a bank approved by
PFS VI from time to time plus four percent per annum times the
Outstanding Purchase Amount calculated in advance and due and
payable at each closing and reconciled quarterly based on the
average daily balance
(i) Eligible Receivable. The Third Party Reimbursable Claim
portion which meets Purchaser criteria for Purchase which
together with other such Claims become part of a Batch for
purchase by Purchaser.
(j) Event of Default. Any of the events described in Section
6.01 hereof.
(k) Government Programs. The Medicare Program, Medicaid
Program, Title V Maternal and Child Health Services Block
Grant Program, and the Title XX Social Services Block Grant
Program or any other governmental program which provides
payments to Provider for patient care services.
(l) Governmental Receivable. Any Eligible Receivable
reimbursable by a Government Program.
(m) Ineligible Receivable. means a Receivable (a) with respect
to which all of the representations and warranties set forth
in Section 4.01(b) of this Agreement are not true and correct,
or (b) that remains unpaid by the Third Party Obligor one
hundred eighty (180) days after the date it becomes a
Purchased Receivable, unless it has not been paid due to a
bankruptcy, insolvency or receivership proceeding with respect
to the Third Party Obligor that commenced after such date.
(n) Lock Box Agreement. The Lock Box Agreement referred to in
Section 2.01(d)(ii).
(o) Mandatory Repurchase Date. Two years from the date of the
Initial Closing or subsequent dates as effected by Provider
pursuant to Section 6.03.
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(p) Misdirected Collections. The amount defined in Section
5.01(d) hereof.
(q) Notice. The notice addressed to Third Party Obligors from
the Provider set forth in Exhibit "B" hereto.
(r) Obligor. The entity that is the obligor on a Purchased
Receivable.
(s) Origination Fee. At the initial closing, there will be an
origination fee of three percent (3%) of the first Outstanding
Purchase Balance less $2500.00 previously paid and an
additional three percent (3%) of incremental increases in
Outstanding Purchase Balance.
(t) Outstanding Purchase Amount. The Participation Threshold
Amount set forth on all Assignments less amounts collected by
Purchaser on all Purchased Receivables.
(u) Outstanding Balance. The balance of the Warranted
Collection Value of a Purchased Receivable or Purchased Batch
unpaid from time to time.
(v) Participation Threshold Amount. An amount equal to the
Advance Rate multiplied by the Warranted Collection Value.
(w) Periodic Summary. The report summarizing the purchasing
activity with respect to the Provider's Receivables prepared
by Purchaser on a periodic basis.
(x) Purchaser Collection Account. The account under the
control of Purchaser defined in Section 5.01(b) hereof.
(y) Purchaser Collection Bank. The financial institution
defined in Section 5.01(b) hereof.
(z) Purchased Batch. means a Batch sold and assigned by the
Provider under the terms of this Agreement.
(aa) Purchase Commitment. means the sum of $10,000,000 or
seventy-five percent (75%) of Warranted Collection Value of
Purchased Receivables, whichever is less.
(bb) Purchase Documents. The documents relating to the
transactions contemplated by the Agreement as defined in
Section 2.01(d) hereof.
(cc) Purchase Date. Each date on which any Eligible Receivable
or Batch is purchased by Purchaser pursuant to the terms
hereof.
(dd) Purchase Price. The amounts described in Section 2.03
hereof.
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(ee) Purchased Receivable. Any Eligible Receivable sold and
assigned to Purchaser by the Provider pursuant to the terms of
this Agreement.
(ff) Purchased Receivable File. The documents described in
Section 2.01(d) hereof.
(gg) Receivable. Any right to receive payments from Obligors
due on or with respect to the patient accounts receivable of
the Provider.
(hh) Receivables Management Agreement. The Agreement of even
date between Provider and Purchaser whereby under certain
circumstances, Purchaser will provide services (as defined
therein) with respect to Claims.
(ii) Repurchase Price. The price for a Repurchased Receivable
set forth in Section 2.07 hereof.
(jj) Repurchased Receivable. Any Receivable repurchased by the
Provider as defined in Section 2.07 hereof.
(kk) Settlement Date. The date defined in Section 2.06 hereof.
(ll) Substitute Receivable. has the meaning ascribed to it in
Section 2.07 of this Agreement.
(mm) Third Party Obligor. An obligor described in Section
2.01(a) hereof.
(nn) UCC. The Uniform Commercial Code as in effect in the
applicable jurisdiction.
(oo) Warranted Collection Value. With respect to any Purchased
Batch or individual Receivable an amount equal to the expected
net patient reimbursement value of all invoices in the
Purchased Batch or of an individual Receivable, as appropriate
as set forth in the respective Assignments and represented to
Purchaser by the Provider to be accurate.
ARTICLE II
PURCHASE AND ASSIGNMENT
Section 2.01 Agreement to Purchase and to Assign.
(a) From time to time and upon the terms and conditions
provided herein, the Provider agrees to sell and assign to
Purchaser as absolute owner, and Purchaser agrees to purchase
from the Provider, all the Provider's rights, title and
interest in and to Batches of Eligible Receivables Provider
shall provide Purchaser with access to all books and records
related to the foregoing.
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(b) From time to time during the term of this Agreement, the
Provider shall submit to Purchaser a list of Eligible
Receivables that the Provider is selling to Purchaser,
together with any information relating thereto requested by
Purchaser.
(c) Purchaser shall specify on the Assignment each Eligible
Receivable that it is purchasing from Provider and included in
a Batch.
(d) No later than five (5) Business Days after receipt of an
Assignment, the Provider shall notify Purchaser of its
acceptance of the Assignment by returning one executed
counterpart of the Assignment together with fully executed
copies of the following documents with respect to each
Eligible Receivable (collectively such documents are herein
referred to as a "Purchased Receivable File"):
(i) A duplicate invoice or electronic file format
relating to each Eligible Receivable;
(ii) A Notice signed by the Provider and addressed to
each Third Party Obligor of an Eligible Receivable
(other than a Governmental Receivable), directing
each Third Party Obligor to make payment thereof to
the Purchaser Lock Box.;
(iii) A file-stamped acknowledgment copy of a UCC-1
financing statement that names the Provider as Seller
and Purchaser as Purchaser or secured party, as
appropriate, that identifies the Eligible Receivables
as the collateral covered thereby, that is signed by
the Provider and Purchaser, if required by the
applicable UCC, and that otherwise is in form and
substance appropriate and sufficient and has been
filed in all filing offices where a financing
statement should be filed under the UCC to perfect a
security interest in the Provider's accounts and
general intangibles.
(iv) Such releases or intercreditor agreement as
Purchaser may require in respect of the Purchased
Receivables, in form and substance acceptable to
Purchaser, signed by any and all third parties
claiming an interest in such Purchased Receivables;
(v) Such other documents as may be reasonably
requested by Purchaser.
Section 2.02 Warranted Collection Value.
The Assignment shall also specify the Warranted Collection Value for a
Batch. The Purchase Price for a Purchased Batch shall be in an amount
and payable as set forth in Section 2.03 below.
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Section 2.03 Payment of Purchase Price.
At the time of the Assignment, Purchaser shall pay to Provider with
respect to a Purchased Batch, (a) in immediately available funds an
amount equal to the Participation Threshold amount minus the Discount
Fee; plus (b) the residual interest of Provider represented by the
Certificate of Participation (the "COP"). The amounts due to the
Provider under the COP shall be paid on the next Settlement Date
occurring after the date of collection. The Purchase Price shall be
subject to offset against any amounts owed by the Provider to Purchaser
under any provision of this Agreement.
Upon the payment of the amount described in (a) and (b) above the
Provider shall have sold to Purchaser all of its tight, tide and
interest in and to the Eligible Receivables constituting such Purchase
Batch and any Substitute Receivables as provided in Section 2.07
hereof. Purchaser shall become the absolute owner of such Purchased
Batch and of all the proceeds thereof, shall enjoy all the Provider's
rights and remedies with respect to the Purchased Batch and shall
become subrogated to the Provider with respect to the Provider's rights
under any guaranty, assignment or security for the payment of any
Purchased Receivable, except as limited by Medicare and Medicaid laws.
Section 2.04 Purchase Dates.
The first Purchase Date is the date set forth in the Assignment.
Subsequent purchases may be made on any Business Day in accordance with
the terms and conditions hereof.
Section 2.05 Obligation to Purchase.
Notwithstanding anything to the contrary set forth in this Agreement,
Purchaser shall not be required to purchase any Batch if at the time it
is offered by the Provider, the aggregate Outstanding Purchase Amount
of all Purchased Batches (determined as of the last day in the period
covered by the most recent Periodic Summary) exceeds or as a result of
the purchase of such Batch would exceed the Purchase Commitment, or if
Purchaser reasonably believes that any of the Eligible Receivables
included in such Batch are or may become Ineligible Receivables.
Further, Purchaser shall have no obligation to purchase any Eligible
Receivables (a) at any time an Event of Default has occurred and
remains unremedied, or (b) after the date this Agreement is terminated
pursuant to Section 6.03.
Section 2.06 Periodic Settlement.
Purchaser shall regularly issue to Provider a Periodic Summary which
shall set forth the total amounts received with respect to Purchased
Receivables in that period. The Periodic Summary shall also set forth
the Warranted Collection Value for Batches purchased during that period
reduced by the amount of any Ineligible Receivables reassigned to
Provider during that period or any other amounts set off by Purchaser
under the terms hereof. The Periodic Summary shall also set forth any
amounts received during that period not allocable to Purchased
Receivables. Any net settlement due to the Provider will be credited to
the Provider on the next succeeding Business Day (the "Settlement
Date").
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Section 2.07 Ineligible Receivables.
If a Purchased Receivable becomes, an Ineligible Receivable, the
Provider shall cure such breach within five days of the earlier of
notification to, or discovery by, the Provider of the breach. If such
breach is not so cured, within seven days of the original notification
or discovery of the breach, the Provider shall substitute for the
Ineligible Receivables one or more other Eligible Receivable
("Substitute Receivable") (and the Provider shall deliver to Purchaser
an executed Assignment relating to such Receivable together with the
Purchased Receivable File with respect to each such Receivable). The
aggregate Warranted Collection Value of the Substitute Receivable shall
be equal to or greater than that of the Ineligible Receivable. Upon
substitution, each Substitute Receivable shall be treated as the
Purchased Receivable it replaced for all purposes. In the event that
sufficient Substitute Receivables are not provided by the Provider
within such time, the Provider, upon demand, shall repurchase such
Ineligible Receivable (which upon repurchase shall become a
"Repurchased Receivable") from Purchaser at a repurchase price (the
"Repurchased Price") equal to the Outstanding Purchase Amount with
respect to such Ineligible Receivable, plus interest calculated at 14%
per annum since the Purchase Date Upon remittance of the Repurchase
Price, Purchaser shall reassign the Ineligible Receivable to the
Provider free and clear of any liens and encumbrances arising by,
through or under Purchaser or its assigns without any representation,
warranty or recourse whatsoever, and Purchaser shall execute such
documents as are appropriate as are requested by Provider in connection
thereto. In addition to all other rights and remedies available to
Purchaser at law or in equity, Purchaser may offset against any amounts
it owes the Provider under this Agreement any amounts due Purchaser
with respect to a Repurchased Receivable. If after receipt of all or
any part of the Repurchase Price for any Repurchased Receivable,
Purchaser is compelled to surrender such payment to any person or
entity because such payment is determined to be void or voidable as a
preference, impermissible set off, or a diversion of trust funds, this
Agreement shall continue in full force and the Provider shall be liable
to Purchaser for, and shall indemnify and hold Purchaser harmless for,
the amount of such payment surrendered. The provisions of this Section
2.07 shall be and remain effective notwithstanding any contrary action
which may have been taken by Purchaser in reliance upon such payment,
and any such contrary action so taken shall be without prejudice to
Purchaser's rights under this Agreement and shall be deemed to have
been conditioned upon such payment having become final and irrevocable.
The provisions of this Section 2.07 shall survive the termination of
this Agreement.
Section 2.08 Disclaimer of Right of Repurchase.
Except as set forth in Section 2.07, or Section 6.03 the Provider shall
have no right to repurchase any Purchased Receivable from Purchaser.
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ARTICLE III
SECURITY INTEREST
Section 3.01 Security Interest.
In the event that, contrary to the mutual intent of the Provider and
Purchaser, the purchase of the Purchased Receivables is not
characterized as a sale, the Provider shall, effective as of the date
hereof, be deemed to have granted and the Provider does hereby grant to
Purchaser a first priority security interest in and to any and all the
Purchased Receivables (and any Substitute Receivables as provided in
Section 2.07) and the proceeds thereof to secure the repayment of all
amounts advanced to the Provider hereunder with accrued interest
thereon equal to the Discount Fee and this Agreement shall be deemed to
be a security agreement. With respect to such grant of a security
interest, Purchaser may at its option exercise from time to time any
and all rights and remedies available to it under the UCC or otherwise.
The Provider agrees that five days shall be reasonable prior notice of
the date of any public or private sale or other disposition of all or
part of the Purchased Receivables. The Provider agrees to notify
Purchaser in writing thirty (30) days prior to any change in any such
location. The exact name of the Provider is as set forth at the
beginning of this Agreement, and except as set forth on Exhibit "D"
hereof, the Provider has not changed its name in the last five years,
and during such period the Provider did not use, nor does the Provider
now use any fictitious or trade name. The Provider shall notify
Purchaser, in writing, 30 days prior to any name change.
ARTICLE IV
REPRESENTATIONS, WARRANTIES AND COVENANTS OF PROVIDER AND
Purchaser
Section 4.01 Representations and Warranties of Provider.
Provider represents and warrants to Purchaser as follows:
(a) With respect to the Provider, as of the date hereof and as
of the date of each purchase of Eligible Receivables:
(i) If a corporation or a partnership, the Provider
is duly organized, validly existing and in good
standing as such under the laws of the jurisdiction
of its organization, and has all the power and
authority necessary to carry on its business as now
conducted and to enter into and perform this
Agreement, the Assignments and all other documents
now or hereafter executed in connection herewith
(collectively, the "Purchase Documents"). The
execution, delivery and performance by the Provider
of the Purchase Documents have been duly authorized
by all appropriate action on behalf of the Provider.
If a sole proprietorship, the Provider has the
necessary power and capacity under applicable law to
carry on its
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business as now conducted and to enter into and
perform the Purchase Documents.
(ii) When executed and delivered, the Purchase
Documents will be legal, valid and binding
obligations of the Provider, enforceable against the
Provider in accordance with their respective terms.
Upon the filing of financing statements in all
appropriate jurisdictions and notification to the
applicable Third Party Obligors, any security
interest in favor of Purchaser granted under Section
3.01 of this Agreement will be perfected.
(iii) The execution, delivery and performance of the
Purchase Documents will not violate any provision of
law or regulation or any order or decree of any court
or governmental agency, or violate any provision of
the Provider's organizational documents (if a
corporation or partnership) or any agreement to which
the Provider in a party or by which any of its assets
are bound, and will not be in conflict with, result
in a breach of, or constitute a default under, any
such agreement or result in the creation of any lien
or security interest upon any of the Provider's
assets, except in favor of Purchaser.
(iv) The Provider has all permits, licenses,
accreditation, certifications, authorizations,
approvals, consents and agreements of all Third Party
Obligors, governmental agencies and
instrumentalities, accreditation agencies and any
other person, necessary or required for the Provider
to own the assets that it now owns, to carry on its
business as now conducted, to execute, deliver and
perform the Purchase Documents, and to receive
payments from Third Party Obligors; and the Provider
has not been notified by any such Third Party
Obligor, governmental agency or instrumentality,
accreditation agency or any other person, during the
immediately preceding twenty-four (24) month period,
that such party has rescinded or not renewed, or
intends to rescind or not renew, and such permit,
license, accreditation, certification, authorization,
approval, consent or agreement granted by it to the
Provider or to which it and the Provider are parties.
(v) There are no actions, suits or proceedings
pending or threatened against the Provider before any
court, government agency or other tribunal, which
could materially and adversely affect its ability to
perform under the Purchase Documents, and the
Provider is not currently subject to, and does not
intend to file, any bankruptcy or insolvency
proceeding.
(b) With respect to the Purchased Receivables or a Purchased
Batch, as of the date such Batch or Eligible Receivables are
purchased:
(i) Each Purchased Receivable File is complete and
correct and all documents, attestations and
agreements relating to the Purchased
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Receivables that have been delivered to Purchaser
with respect to each Purchased Receivable are true
and correct, each Purchased Receivable has been
billed to the applicable Third Party Obligor, all
requested supporting claim documents with respect to
such Purchased Receivable have been delivered to the
Third Party Obligor, all information set forth in the
bill and supporting claim documents is true, complete
and correct, and if additional information is
requested by the Third party Obligor, the Provider
will provide the same, and if any error has been
made, the Provider will promptly correct the same
and, if necessary, rebill such Purchased Receivable.
(ii) There is no security interest or lien in favor
of any third party, nor any recording or filing
against the Provider, as debtor, covering or
purporting to cover any interest of any kind in any
Purchased Receivable, except as has been released by
each party holding such adverse interest. Upon
payment of the Purchase price with respect to a
Purchased Batch or Purchased Receivable, all right,
title and interest of the Provider with respect
thereto shall be vested in Purchaser, free and clear
of any lien, security interest, claim or encumbrance
of any kind, and the Provider agrees to defend the
same against the claims of all persons.
(iii) Each Purchased Receivable (A) is payable, in an
amount not less than its Warranted Collection Value,
by the Third Party Obligor identified by the Provider
as being obligated to do so, and is recognized as
such by the Third Party Obligor, and such Third Party
Obligor is obligated to pay the full Warranted
Collection Value without dispute, reduction in amount
for any reason whatsoever, offset, defense or
counterclaim, (B) is based on an actual and bona fide
rendition of services or the sale or rental of
equipment, merchandise and supplies to the patient by
the Provider in the ordinary course of business, (C)
is denominated and payable only in lawful currency of
the United States, and (D) is an account receivable
or general intangible within the meaning of the UCC
of the state in which the Provider has its principal
place of business, or is a right to payment under a
policy of insurance or proceeds thereof, and is not
evidenced by any instrument or chattel paper. There
is no payor other than the Third Party Obligor
identified by the Provider as the payor primarily
liable on any Purchased Receivable.
(iv) No Purchased Receivable (A) is subject to any
action, suit, proceeding or dispute (pending or
threatened), set-off, counterclaim, defense,
abatement, suspension, deferment, deductible,
reduction or termination by the Third Party Obligor,
or (B) was billed to the appropriate Third party
Obligor later than the sixty-first (61st) day prior
to the last day such Purchased Receivable could have
been billed to be eligible for payment under any
agreement, statute, rule or regulation applicable to
such Third Party Obligor.
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(v) The Provider does not have any guaranty of,
letter of credit providing credit support for, or
collateral security for, any Purchased Receivable,
other than any such guaranty, letter of credit or
collateral security as has been assigned to
Purchaser, and any such guaranty, letter of credit or
collateral security is not subject to any lien in
favor of any other person.
(vi) The services provided or equipment, merchandise
and supplies sold or rented and reflected by each
Purchased Receivable were medically necessary for the
patient, and the patient has received such services.
(vii) The fees charged for the services or equipment,
merchandise and supplies sold or rented constituting
the basis for the Purchased receivables are
consistent with the usual, customary and reasonable
fees charged by other similar medical service
providers in the Provider's community or the
community in which the patient resides, whichever is
less, for the same or similar service.
(viii) The Third Party Obligor with respect to each
Purchased Receivable is (A) not currently the subject
of any bankruptcy, insolvency or receivership
proceeding, nor is it unable to make payments on its
obligations when due, (B) located in the United
States, and (C) one of the following: (a) a party
which in the ordinary course of its business or
activities agrees to pay for healthcare services
received by individuals, including, without
limitation, commercial insurance companies and
non-profit insurance companies (such as Blue Cross
and Blue Shield) issuing health, personal injury,
workmen's compensation or other types of insurance,
employers or unions which self-insure for employee or
member health insurance, prepaid healthcare
organizations, preferred provider organizations,
health maintenance organizations or any other similar
person, (b) a state, an agency or instrumentality of
a state or a political subdivision of a state, or (c)
the United States or an agency or instrumentality of
the United States.
(ix) The sale of Purchased Receivables hereunder is
made in good faith and without intent to hinder,
delay or defraud present or future creditors of the
Provider.
(x) The insurance policy, contract or other
instrument obligating a Third Party Obligor to make
payment with respect to any Purchased Receivable (A)
does not contain any provision prohibiting the
transfer of such payment obligation from the patient
to the Provider, or from the Provider to Purchaser
(B) has been duly authorized and, together with the
applicable Purchased Receivable, constitutes the
legal, valid and binding obligation of the Third
Party Obligor in accordance with its terms, (C)
together with the applicable Purchased Receivable,
does not
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contravene in any material respect any requirement of
law applicable thereto, and (D) was in full force and
effect and applicable to the patient at the time the
services constituting the basis for the Purchased
Receivable were performed.
(xi) The representations, warranties and statements
made by the Provider in the Purchase Documents, any
financial information with respect to the Provider
delivered to Purchaser or any other related
documents, including, without limitations, with
respect to the description of the Purchased
Receivables in the Assignments, do not contain any
untrue statement of material fact or omit to state a
material fact necessary to make the statement made
not misleading.
None of the foregoing representations and warranties shall be deemed to
constitute a guaranty by the Provider that the Purchased Receivables will be
collected by Purchaser.
Section 4.02 Covenants of Provider.
The Provider covenants and agrees with Purchaser as follows:
(a) In connection with the initial purchase of Eligible
Receivables or a Batch by Purchaser, the Provider will execute
such financing statements under the UCC naming Purchaser as
secured party as Purchaser may reasonably request with respect
to any such Eligible Receivables or Batch that may be
purchased pursuant to this Agreement. From time to time, upon
request, the Provider will provide Purchaser with any
additional information, will execute and deliver to Purchaser
any additional agreements, instruments, documents or financing
statements and will take all actions deemed by Purchaser as
necessary or desirable to effectuate the provisions of the
Purchase Documents, to evidence, protect and perfect the
assignment of the title to the Purchased Receivables and to
facilitate the collection of the Purchased Receivables.
(b) Each of Purchaser and its agents and representatives are
hereby irrevocably constituted and designated as the
Provider's attorneys-in-fact, which irrevocable power of
attorney is coupled with an interest, (i) to endorse or sign
the Provider's name to financing statement remittances,
invoices, assignments, checks, drafts or other instruments or
documents in respect of the Purchased Receivables, (ii) to
notify Third Party Obligors to make payments on the Purchased
Receivables directly pursuant to and subject to the terms and
provisions of Section 5.01(b) hereof, and (iii) to bring suit
in the Provider's name and to settle or compromise such
Purchased Receivables as Purchaser may, in its discretion,
deem appropriate.
(c) The Provider will pay on demand all Purchaser's costs and
expenses, including, without limitation, reasonable attorneys'
fees and expenses, interest expenses which may be expended or
incurred by Purchaser in enforcing or
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attempting to enforce any of Purchaser's rights against the
Provider under the Purchase Documents.
(d) The Provider shall keep its books and accounts in
accordance with generally accepted accounting principals and
shall make a notation on its books and records, including any
computer files, to indicate which Claims have been sold to
Purchaser. Purchaser or its designated representatives from
time to time may verify the Purchased Receivables, inspect,
check, take copies of or extracts from the Provider's books,
records and files, and the Provider will make the same
available to Purchaser or such representatives at any
reasonable time for such purposes.
(e) The Provider agrees that Purchaser will be permitted to
have at least one of its agents or representatives physically
present in the Provider's administrative offices during normal
business hours to assist the Provider in performing its
obligations under this Agreement, including its obligations
with respect to the collection of Purchased Receivables
pursuant to Section 5.01 herein.
(f) So long as this Agreement is in effect the Provider will
deliver to Purchaser, (i) within forty-five (45) days after
the end of each fiscal quarter, the Provider's consolidated
financial statements for such period and for that portion of
its fiscal year through the end of such period, (ii) within
ninety (90) days after the end of the Provider's fiscal year,
the Provider's audited annual consolidated financial
statements for such year (or if such statements are not
audited, statements certified by the Provider's chief
financial officer and (iii) promptly upon request, such other
information concerning the Provider as Purchaser may from time
to time request, including Medicare cost reports and audits.
(g) The Provider shall promptly notify Purchaser in the event
of any action, suit, proceeding, dispute, offset, deduction,
defense or counterclaim that is or may be asserted by a Third
Party Obligor with respect to any Purchased Receivable. The
Provider shall make all payments to the Third Party Obligors
necessary to prevent the Third Party Obligors from offsetting
any earlier overpayment to the Provider against any amounts
the Third Party Obligors owe on any Purchased Receivables.
(h) The Provider shall do nothing to impede or interfere with
the collection of the Purchased Receivable (as provided in
this Agreement), and shall not amend, waive or otherwise
permit or agree to any deviation from the terms or conditions
of any Purchased Receivable. The Provider shall not purport to
sell, assign or grant a security interest in any Purchased
Receivable after it has been sold to Purchaser.
(i) The Provider shall treat the assignment of Purchased
Receivables pursuant to this Agreement as a sale for all
purposes, including tax and accounting.
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<PAGE>
(j) Any payment on a Purchased Receivable remitted directly to
Provider shall be immediately transmitted to Purchaser or its
designee.
(k) Provider shall use its best efforts to make collections on
all Purchased Receivables for the benefit of Purchaser. In the
event of a default, Purchaser may at its option assume
responsibilities for servicing pursuant to the terms of the
Claims Management Agreement.
Section 4.03 Representations and Warranties of Purchaser.
Purchaser represents and warrants to Provider as follows:
(a) Purchaser has been duly organized, is validly existing and
in good standing as a corporation under the laws of the
Commonwealth of Pennsylvania with full corporate power and
authority to own its properties and to transact the business
in which it is now engaged.
(b) The purchase by Purchaser of the Purchased Receivables
pursuant to this Agreement and the consummation of the
transactions herein contemplated will not conflict with or
result in a breach of any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which
Purchaser is a party or by which it is bound or to which any
of the property or assets of Purchaser is subject nor will
such action result in any violation of the provisions of the
Certificate of Incorporation or the Bylaws of Purchaser or of
any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over Purchaser
or any of its properties or assets; and no consent, approval,
authorization, order, registration or qualification of or with
any court or any such regulatory authority or other
governmental agency or body is required for the purchase by
Purchaser of the Receivables hereunder.
(c) This Agreement has been duly authorized, executed and
delivered by Purchaser and constitutes the valid and legally
binding obligation of Purchaser enforceable against Purchaser
in accordance with its terms, subject to applicable
bankruptcy, reorganization, insolvency, moratorium or other
laws and subject as to enforceability to general principles of
equity (regardless of whether enforcement is sought in a
proceeding in equity or at law).
(d) Purchaser shall provide Provider with a copy of any Notice
of Default received by Purchaser from any of its lenders or
creditors. Purchaser shall use its best efforts to prevent any
of its creditors from interfering with Provider's quiet
enjoyment of its rights and benefits hereunder.
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ARTICLE V
COLLECTIONS
Section 5.01 Non Government Receivables.
(a) Purchaser Collection Account. Contemporaneously with the
execution of this Agreement, Purchaser shall open a lock box
(the "Purchaser Lock Box") the fees of which shall be paid by
Provider for the receipt of all sums representing payments on
all Receivables other than Governmental Receivables. The
Provider shall direct that all payments of Receivables other
than Governmental Receivables be made to the Purchaser Lock
Box. All payments of Receivables received at the Purchaser
Lock Box shall be deposited to the Purchaser Collection
Account at the Purchaser Collection Bank. All payments of
Receivables received by the Provider shall be held in trust
for Purchaser and shall be mailed to the Purchaser Collection
Account. The Collection Account shall be in the name of and
under the exclusive control of Purchaser, and the Provider
shall have no right or interest in the Purchaser Collection
Account. All payments of Purchased Receivables will be deemed
to have been collected by Purchaser when deposited to the
Purchaser Collection Account, and shall be applied to the
reduction of the Outstanding Purchase Amount as of the date of
deposit.
The Purchaser Collection Account shall be at a bank to be
designated by Purchaser.
(b) Funds deposited to the Purchaser Collection Account that
do not represent payments of Purchased Receivables shall be
remitted to the Provider on each Settlement Date, provided
that Purchaser shall have the right, in the Event of Default,
to deduct from such funds and to retain any amounts owed by
the Provider under the terms of this Agreement.
(c) All accounts with respect to Non-Governmental Receivables
received directly by Provider from Third Party Obligors or
made other than as provided in the Notice set forth in Exhibit
"B" hereto ("Misdirected Collections") shall be remitted by
Provider directly to the Purchaser Collection Account on the
Business Day following Provider's receipt thereof and shall be
held in trust for Purchaser, until such time, as remittance is
made by Provider to Purchaser.
Section 5.02 Government Receivables.
(a) Provider Collection Account. Provider shall maintain a
lock box or P O Box ("Lock Box") the fees of which shall be
paid by Provider and an account (the "Provider Collection
Account"). Payments with respect to the Government Receivables
will be made to the Lock Box. Collections with respect to the
Governmental Receivables shall be deposited in the Provider
Collection Account at the Provider Collection Bank (as defined
below). Collections with respect to
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the Government Receivables will be transferred when they
become immediately available funds to an account designated by
Purchaser.
The Provider Collection Account shall be maintained at a
financial institution that is insured by the Federal Deposit
Insurance Corporation (the "Provider Collection Bank") and
shall be in the name of and under the control of the Provider.
The Provider shall transmit to Purchaser daily, either
electronically or by hard copy, information relating to the
identification of all sums deposited in the Provider
Collection Account until all Purchased Receivables sold
hereunder have been collected. It is understood that the
Provider Collection Bank shall act solely as the agent of the
Provider.
(b) Purchaser Collection Account. Contemporaneously with the
execution of this Agreement, Purchaser shall open a lock box
(the "Purchaser Lock Box") for the direct receipt of all sums
representing payments on all Receivables other than
Governmental Receivables and for the deposit or transfer by
Provider of sums representing payments on Government
Receivables paid to the Provider Collection Account. The
Provider shall direct that all payments of Receivables other
than Governmental Receivables be made to the Purchaser Lock
Box. The Provider shall transfer to, or deposit in, on a daily
basis, as funds become available, all sums collected in the
Provider Collection Account to the Purchaser Collection
Account. Standing instructions shall be issued by the Provider
to the Provider Collection Bank. Any change in such
instructions without the written consent of Purchaser shall be
an event of default. All payments of Receivables received at
the Purchaser Lock Box shall be deposited to the Purchaser
Collection Account at the Purchaser Collection Bank. All
payments of Receivables received by the Provider shall be held
in trust for Purchaser and shall be deposited to the Purchaser
Collection Account on the date of receipt. The Collection
Account shall be in the name of and under the exclusive
control of Purchaser, and the Provider shall have no right or
interest in the Purchaser Collection Account. All payments of
Purchased Receivables will be deemed to have been collected by
Purchaser when deposited to the Purchaser Collection Account,
and shall be applied to the reduction of the Outstanding
Purchase Amount as of the date of deposit.
(c) Funds deposited to the Purchaser Collection Account that
do not represent payments of Purchased Receivables shall be
remitted to the Provider on each Settlement Date, provided
that Purchaser shall have the right to deduct from such funds
and to retain any amounts owed by the Provider under the terms
of this Agreement.
(d) It is the intent of the parties to comply with the
relevant rules and regulations of the Health Care Financing
Administration with respect to the financing of accounts
receivable, without limiting the rights of Purchaser
hereunder.
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<PAGE>
ARTICLE VI
EVENTS OF DEFAULT, TERMS AND TERMINATION
Section 6.01 Events of Default.
All of the Provider's obligations to Purchaser hereunder, at
Purchaser's option, shall be due and payable without notice or demand
upon termination of this Agreement. This Agreement may be terminated by
Purchaser upon five (5) business days prior written notice of the
occurrence of, and the Provider's failure to cure within such period,
any one or more of the following events of default ("Events of
Default"):
(a) If the Provider shall fail to pay when due any amounts
owing to Purchaser hereunder or under the Standby Claims
Management Agreement;
(b) If the Provider fails to observe or perform any of the
covenants or agreement contained in this Agreement or under
the Standby Claims Management Agreement;
(c) If any representation, warranty or statement of fact made
to Purchaser at any time by the Provider is false or
misleading in any material respect;
(d) If any material obligation of the Provider to any person
becomes or is declared to be in default and the obligee
initiates action with respect to collateral securing such
obligations.
(e) If the Provider shall become insolvent, fail to meet its
debts as they mature, and as a result of such failure the
obligee initiates action with respect to collateral securing
such obligations, or a meeting of creditors or have a
creditors' committee appointed, file or have filed against it
a petition in bankruptcy, arrangement or reorganization, or if
the Provider suspends or discontinues doing business for any
reason, or if the Provider makes an assignment for the benefit
of creditors, or if a receiver or trustee of any kind is
appointed for it or any of its property; or
(f) If, in the opinion of Purchaser, a material adverse change
in the financial condition, business, operations or control of
the Provider shall have occurred, or any other event or
circumstance shall have occurred which give reasonable grounds
for Purchaser to conclude that the Provider may not or will
not be able to perform its obligations hereunder.
Section 6.02 Remedies and Provider's Waiver of Jury Trial.
(a) Each of Purchaser's rights and remedies under this
Agreement is not intended to be exclusive, and such rights and
remedies are in addition to and not by way of limitation of
any other rights or remedies Purchaser may have under
applicable law (except as those rights are limited by the
application of the
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Medicare and Medicaid laws). Purchaser shall have the right,
in Purchaser's sole discretion, to determine which rights and
remedies, and in which order any of the same, are to be
exercised. No act, failure or delay by Purchaser shall
constitute a waiver of any of Purchaser's rights and remedies.
No single or partial waiver by Purchaser of any provision of
this Agreement, or breach or default hereunder, or of any
right or remedy which Purchaser may have, shall operate as a
waiver of the same or any other provision, breach, default,
right or remedy on a future occasion. The Provider waives
presentment, notice of dishonor, protest and notice of all
instruments included in or evidencing any of the Provider's
obligations to Purchaser and of any and all notices or demands
whatsoever except as expressly provided for herein. The net
proceeds resulting from the exercise of any of Purchaser's
rights or remedies shall be applied to the payment of the
Provider's obligations to Purchaser in such order as Purchaser
may elect. The Provider shall remain liable to Purchaser for
any deficiency.
(b) Waiver of Jury Trial and Jurisdiction. It is agreed that
all disputes will be resolved via arbitration pursuant to
Section 14 (i). Notwithstanding that, would, for any reason,
the arbitration clause be defaulted, the provider hereby
waives all rights to a trial by jury in the event of any
litigation with respect to any matter connected with the
purchased receivables, and the provider hereby irrevocably
consents to the jurisdiction of the state courts of the
Commonwealth of Pennsylvania and of the federal courts located
in the eastern district of the Commonwealth of Pennsylvania in
connection with any action or proceeding arising out of or
relating to the purchased receivables. In any such litigation,
the provider waives personal service of any summons, complaint
or other process and agrees that service thereof may be made
by certified or registered mail directed to the provider at
the provider's address set forth herein. Within 30 days after
such mailing, the provider shall appear in answer to such
summon, complaint or other process, failing which the provider
shall be deemed in default and judgment may be entered by
Purchaser against the provider for the amount of the claim and
other relief requested therein.
Section 6.03 Term and Termination.
This Agreement shall continue in full force and effect for two years
from the date of the initial closing provided that Purchaser shall have
the right to terminate this Agreement immediately at any time upon the
occurrence of any Event of Default. Purchaser shall have no further
obligation to purchase Eligible Receivables, and may require the
Provider to repurchase all Purchased Batches for an amount equal to the
aggregate Outstanding Purchase Amount. However, termination shall not
relieve or discharge the Provider from its duties, obligations or
covenants under this Agreement until the aggregate Outstanding Purchase
Amount with respect to Purchased Batches is zero and all of the
Provider's obligations hereunder have been satisfied or paid in full,
and all of the terms, provisions and conditions of this Agreement shall
remain in full force and effect until such time. If after receipt of
any payment of all or any part of the Provider's indebtedness
hereunder, Purchaser is for any reason compelled to surrender such
payment to any person or entity, because such payment is determined to
be void or
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<PAGE>
voidable as a preference, impermissible setoff, or a diversion of trust
funds, this Agreement shall continue in full force and the Provider
shall be liable to Purchaser for, and shall indemnify and hold
Purchaser harmless for, the amount of such payment surrendered. The
provisions of this Section shall be and remain effective
notwithstanding any contrary action which may have been taken by
Purchaser in reliance upon such payment, and any such contrary action
so taken shall be without prejudice to Purchaser's rights under this
Agreement and shall be deemed to have been conditioned upon such
payment having become final and irrevocable. The provisions of this
Section shall survive the termination of this Agreement. Upon
remittance of the aggregate Outstanding Purchase Amount plus all other
amounts payable to Purchaser by Provider hereunder, Purchaser shall
reassign the outstanding Purchased Receivables to the Provider free and
clear of all liens and encumbrances arising by, through or under
Purchaser or its assigns, otherwise the reassignment shall be without
any representation, warranty or recourse whatsoever, and Purchaser
shall have no further obligation to the Provider with respect to such
documents as are appropriate as requested by Provider in connection
thereto.
ARTICLE VII
INDEMNIFICATION
Section 7.01 Indemnity by Provider.
Neither this Agreement nor any Assignment shall constitute an
assumption by Purchaser of any obligation to a Third Party Obligor or a patient.
The Provider shall indemnify and hold harmless Purchaser, and its officers,
directors and agents, from and against all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses and disbursements
of any kind or nature whatsoever (including reasonable attorney's fees) which
may be imposed on, incurred by or asserted against any of them in any way
relating to or arising out of any breach by the Provider of any representation,
warranty or covenant contained in any Purchase Documents. The indemnity
contained in this Section 7.01 shall survive the termination of this Agreement.
Any amount payable by the Provider to Purchaser under any provision of this
Agreement shall be paid without any deduction or setoff of any kind.
ARTICLE VIII
MISCELLANEOUS
Section 8.01 Notices, Etc.
All notices, demands, instructions and other communications required or
permitted to be given or to be made upon any party hereto shall be in
writing and shall be deemed to be given for purposes of this Agreement
when delivered by facsimile transmission, overnight delivery service,
registered or certified mail, postage prepaid to the address (or to
their respective facsimile number) indicated below or from time to time
furnished by notice to the other party:
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<PAGE>
If to Provider:
Oak Tree Medical Practice, P. C.
163-03 Horace Harding Expressway
Flushing, NY 11365
Telephone No: (718) 460-8400
Telecopier No: (718) 460-3507
If to Purchaser:
PFS VI, Inc.
992 Old Eagle School Rd., Suite 911
Wayne, PA 19087
Telephone No.: 610-989-0200
Telecopier No.: 610-687-6536
Section 8.02 Successors and Assigns.
This Agreement shall be binding upon Provider and Purchaser and their
respective successors and assigns and shall inure to the benefit of
Provider and Purchaser and their respective successors and assigns;
provided that Provider shall not assign any of its rights or
obligations hereunder without the prior written consent of Purchaser.
The Provider acknowledges that Purchaser may assign, pledge or transfer
its rights hereunder and its interest in the Purchase Documents and the
Purchased Receivables to another party, including collateral security
for any indebtedness of Purchaser.
Section 8.03 Severability Clause.
If any provision of this Agreement is held to be invalid, illegal or
unenforceable for any reason or in any respect whatsoever, such
invalidity, illegality or unenforceability shall not affect any other
provisions of this Agreement, and this Agreement shall be construed as
if such invalid, illegal or unenforceable provision had never been
contained herein.
Section 8.04 Amendments; Governing Law.
This Agreement and the rights and obligations of the parties hereunder
(i) may be changed only by an instrument in writing signed by Purchaser
and the Provider (ii) shall be construed in accordance with and
governed by the laws of Pennsylvania.
Section 8.05 Further Assurances.
Provider agrees to do such further acts and things and to execute and
deliver to Purchaser such additional assignments, agreements, powers
and instruments as are required by Purchaser to carry into effect the
purpose of this Agreement or to better assure and confirm unto
Purchaser its rights, powers and remedies hereunder.
Section 8.06 Counterparts
This Agreement may be executed in any number of copies, and by the
different parties hereto on the same or separate counterparts, each of
which shall be deemed to be an original instrument.
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<PAGE>
Section 8.07 Headings.
Section headings used in this Agreement are for convenience of
reference only and shall not affect the construction or interpretation
of this Agreement.
Section 8.08 Waiver.
No delay or omission to exercise any right, power or remedy accruing to
any party hereto shall impair any such right, power or remedy of such
party nor shall it be construed to be a waiver of any such right, power
or remedy nor constitute any course of dealing or performance
hereunder. No waiver shall be effective unless it is in writing and is
received by the waiving party.
Section 8.09 Arbitration.
Arbitration. Any dispute, controversy and/or claim arising out of this
Agreement or breach thereof, shall be resolved, settled and/or
adjudicated through Arbitration administered by and pursuant to the
appropriate rules and procedures of the American Arbitration
Association ("AAA"), Commonwealth of Pennsylvania, and judgment on
award rendered by the arbitrator(s) may be entered in any court having
jurisdiction thereof.
Section 8.10 Attorney's Fees.
If any action, suit or other proceeding is instituted concerning or
arising out of this Agreement, the prevailing party shall recover from
the non-prevailing party all of such party's costs, including any
reasonable attorney's fees incurred in each and every action, suit or
other proceeding, including any and all appeals or petitions therefrom.
As used herein, "prevailing party" shall mean the party entitled to
recover its cost of such action, suit or proceeding, whether or not the
suit proceeds to final judgment and/or the party receiving an award by
a decision of the AAA.
Section 8.11 References.
All references to "Section" contained herein are, unless specifically
indicated otherwise, references to sections of this Agreement. Whenever
herein the singular number is used, the same shall include the plural
where appropriate, and words of any gender shall include each other
gender where appropriate.
Section 8.12 Representations to Survive this Agreement
The representations, warranties and covenants of the Provider contained
herein shall survive the purchase of the Purchased Receivables and the
termination of this Agreement.
Section 8.13 Assignment of Purchaser's Interest.
The Provider hereby acknowledges that Purchaser shall have the right to
sell, assign, transfer and create a security interest in any or all of
the Purchased Receivables conveyed to it hereunder including any
security agreement referred to in Section 4.02(j)) or any security
interest referred to in Section 3.01 hereof; provided that same shall
be limited to sources of funding for the Purchased Receivables
hereunder, shall be limited to financial institutions and accredited
investors and shall provide that any lien or security interest is
released if Purchaser is required to convey or reconvey any Purchased
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<PAGE>
Receivables to Provider. Any such assignment shall accept or recognize
the Provider's rights under the COPs.
IN WITNESS WHEREOF, Provider and Purchaser have caused this Agreement
to be duly executed by their duly authorized officers, all on the date and year
first above
written.
Provider PFS VI, INC
By: /s/ GARY DANZIGER By: /s/ RONALD MEYER
------------------------- -------------------------
Name: Gary Danziger Name: Ronald Meyer
------------------------- -------------------------
Title: COO Title: President
------------------------- -------------------------
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EMPLOYMENT AGREEMENT
AGREEMENT, between New Medical Practice, P.C., a professional
service corporation organized and existing under the laws of the State of New
York with its principal place of business located at 2 Gannett Drive, White
Plains, New York 10604 (the "Corporation") and the undersigned, a professional
employee duly licensed to practice in accordance with the laws of the State of
New York (the "Employee"). The Corporation and the Employee may hereafter be
referred to individually as a "Party" and collectively as the "Parties". The
pronouns "he" and "his" are used exclusively herein only for convenience, and
shall be deemed, when the facts so require, to mean "she" and "her",
respectively.
WITNESSETH:
WHEREAS, the Corporation desires to employ the Employee upon the
terms and conditions hereafter set forth; and
WHEREAS, the Employee desires to accept employment with the
Corporation; and
WHEREAS, the Parties wish to provide high quality professional
care to patients of the Corporation;
NOW, THEREFORE, in consideration of the covenants and agreements
herein made, the parties hereto agree as follows:
<PAGE>
1. EMPLOYMENT.
The Corporation hereby employs the Employee and Employee hereby
agrees to accept employment with the Corporation in the specialty set forth
below.
2. DUTIES AND RESPONSIBILITIES.
2.1 The duties of the Employee shall be those duties customarily
performed by a professional engaged in the practice of his profession including
the provision of administrative services together with such other duties as
shall from time to time be assigned by the Corporation.
2.2 The allocation of administrative and professional services to
be rendered by the Employee, as well as scheduling and location for such
services, is set forth in Schedule "A," annexed hereto and made a part hereof.
3. EMPLOYEE REPRESENTATIONS
The Employee hereby makes the following representations, the
continuing validity of which shall be prerequisite to the obligations of the
Corporation hereunder:
a. The Employee is licensed to practice his profession in the
State of New York.
b. The Employee shall at all times conduct himself in compliance
with all applicable federal, state and local laws, rules and regulations, canons
of professional ethics, the Rules Regulations of the Corporation.
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<PAGE>
4. COMPENSATION.
The Employee shall be compensated as set out on Schedule B. Such
compensation shall be paid bi-weekly, as earned.
5. BENEFITS AND STATUS.
The Employee shall be entitled to only those benefits set out in
Schedule C. Employee shall be an employee and not an independent contractor. The
Corporation shall withhold all applicable taxes from compensation paid to
Employee and shall pay such withheld taxes over to the proper taxing
authorities. The Corporation shall also pay any other required payroll taxes.
6. ADDITIONAL EMPLOYMENT.
The Employee shall devote his entire efforts to his professional
practice with the Corporation pursuant to the terms of this Agreement. The
Employee may not, during the term of this Agreement, otherwise practice his
profession outside of the Corporation.
7. FACILITIES.
The Corporation shall provide and maintain, or cause to be
provided and maintained, during the term of this Agreement, such facilities,
equipment and supplies as it deems necessary for the performance by the Employee
of his duties required under this Agreement.
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<PAGE>
8. PROFESSIONAL LIABILITY COVERAGE INSURANCE.
The corporation shall provide and maintain, or cause to be
provided and maintained, during the term of this Agreement, professional
liability coverage for the Employee covering the acts of the Employee occurring
within the scope of his employment hereunder. Such insurance shall name the
corporation as an insured.
9. BILLING.
The Corporation shall perform, either itself or pursuant to an
agreement with another individual or entity, billing and collection functions
for all services provided by the Employee. The Employee hereby authorizes the
Corporation to accept, or refuse to accept, on behalf of the Employee, any
assignment of insurance benefits (e.g., Medicare, Blue Cross/Blue Shield, etc.)
from an patient receiving services from the Employee pursuant to this Agreement.
At the request of the Corporation, the Employee shall list and designate with
such insurance or other third party payor programs the address of the
Corporation, to the attention of such officer(s) of the Corporation as the
Corporation shall designate, or such other address as the Corporation may
designate, as the sole addressee to which all payment(s) or payment voucher(s)
for services performed by the Employee for patients of the Corporation shall be
mailed. This Agreement shall constitute an assignment by the Employee to the
Corporation of all funds owing or collected for services rendered by the
Employee pursuant to this Agreement, and the Employee shall take all additional
steps reasonably requested
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<PAGE>
by the Corporation to assist in the billing and collection of funds due for
services rendered by the Employee. All funds collected with respect to services
provided pursuant to this Agreement shall be the exclusive property of the
Corporation. Any checks or other funds received by Employee by error or
otherwise, from insurance or other third party payors for, services rendered by
Employee under this Agreement to patients of the Corporation shall be promptly
delivered to the Corporation.
10. TERM OF AGREEMENT.
The effective date of this Agreement shall be October 1, 1996. This
Agreement shall continue in effect for a period of three (3) years unless
terminated an hereinafter provided. After the end of the first three (3) year
term, the Corporation may, at its option, renew this agreement, and the
employment of Employee, for successive one year terms as follows: two (2) months
before the end of the first three (3) year term or any following one (1) year
term the Corporation shall give Employee written notice of intent to renew. The
parties shall then negotiate compensation for the next term. In the event of
failure to agree on compensation, the compensation for the next term shall be
the compensation for the prior term multiplied by twice the Regional Consumer
Price index.
11. TERMINATION
11.1 This Agreement may be terminated at any time:
a. By the Corporation, without notice, upon the
suspension, revocation, cancellation, restriction or limitation
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<PAGE>
of the Employee's license to practice in the State of state of New York;
b. By the Corporation, without notice, upon the
failure of, or refusal by the Employee, to faithfully and diligently perform the
duties and responsibilities set forth in this Agreement, which decision shall be
made in the sole discretion of the Corporation, provided, however, that if
termination occurs for any reason during the first two years of this agreement,
then the compensation provided for herein shall continue to be paid to Employee
over the balance of the first two years in the total amount of Four Hundred
Thousand ($400,000) Dollars, at the times and under the conditions provided for
herein and provided further, however, that after the end of the first one year
term, if termination is made by the Corporation for: any illegal activities of
Employee (established by conviction by a court of competent jurisdiction)
limited to theft from the Corporation, paying for patients or patient abuse;
loss of license; or permanent and total disability, Employee shall be entitled
to no further compensation.
11.2 The Corporation shall, as of the effective date of
termination of this Agreement, be released of any responsibility or obligation
hereunder except payment of compensation and benefits accrued to the effective
date of such termination, except as provided in paragraph 11.1(b) above.
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<PAGE>
12. RESTRICTIVE,COVENANT.
12.1 The Employee acknowledges that by virtue of his employment
hereunder, he will have contacts with and develop and service patients of the
Corporation and "referring sources" of business of the Corporation. In all of
his activities, the Employee, through the nature of his work, will have access
to and will acquire confidential information relating to the business and
operations of the Corporation, including patient lists, and other information
relating to methods of doing business and of referral relationships. The
Employee acknowledges that all such information is the sole property of the
Corporation and constitutes confidential information of the Corporation; that
the disclosure thereof would cause substantial loss to the goodwill of the
Corporation; that disclosure thereof to Employee is being made by the
Corporation only because of the position of trust and confidence which the
Employee will occupy and because of the agreement of the Employee to the
restrictions contained herein; that the knowledge of the Employee of these
matters would enable the Employee, upon termination of this Agreement, to
compete with the Corporation in a manner likely to cause the Corporation
irreparable harm, and disclosure of such matters by the Employee would,
likewise, cause such harm; and that the restrictions imposed upon the Employee
herein would not hamper the Employee in his professional practice. It is
understood and agreed by the Employee and the Corporation that the essence of
this Agreement is that the Parties agree that the patients and the referral
sources of the Corporation will remain the patients and referral
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<PAGE>
sources of the Corporation during the term or this Agreement and thereafter.
12.2 The Employee hereby irrevocably warrants, covenant and
agrees as follows:
a. During the term of this Agreement and thereafter the
Employee shall not take any action whatsoever which may or might disturb the
existing business relationship of the Corporation with any patient or referral
sources of the Corporation.
b. During the term of this Agreement and for two (2) years
thereafter, the Employee shall not solicit business from patients or referral
sources of the Corporation.
c. For a period of two (2) years after leaving employment
of the Corporation, the Employee shall not practice profession in, or in any
manner be associated with an office where health care is provided within ten
(10) miles of the office(s) of the corporation which are in existence at the
time that Employee leaves employment of the Corporation and also in Fairfield
County, Connecticut and lower Westchester County (South of a line drawn across
the County at the top of the City of White Plains.)
12.3 The Employee agrees that in the event of the breach of any
provision of this Agreement, and more particularly, in the event of the breach
of any provision of section 12, the Corporation shall be entitled to obtain a
permanent injunction or
- 8 -
<PAGE>
similar court order enjoining the Employee from violating any of the provisions
of this Agreement, and that pending the hearing and the decision on the
application for such permanent injunction, the Corporation shall be entitled to
a temporary restraining order, without prejudice to any other remedy available
to the Corporation, all at the expense of Employee; provided, however, that the
provisions of section 12 shall in no event be construed to be an exclusive
remedy and such remedy shall be held and construed to be cumulative and not
exclusive of any rights or remedies, whether in law or equity, otherwise
available under the terms of this Agreement or under federal, state and local
statutes, rules and regulations.
12.4 The covenants and agreements made by the Employee in section
12.0 shall be construed as an agreement independent of any other provision in
this Agreement, and the existence of any claim or cause of action by the
Employee against the corporation, whether predicated on this Agreement or
otherwise, shall not constitute defense to the enforcement by the Corporation,
by injunctive relief or otherwise, of the provisions of section 12.
13. MISCELLANEOUS.
13.1 Entire Agreement.
This Agreement, including any Schedules referred to
herein, sets forth the entire agreement and understanding between the Parties
and merges and supersedes all prior discussions, agreements, and understandings
between the Parties. No Party shall be bound by any condition, definition,
warranty or
- 9 -
<PAGE>
representation other than as expressly provided for in this Agreement.
13.2 Modification.
This Agreement shall not be changed, modified or amended,
except by a writing signed by the Parties hereto and this Agreement may not be
discharged except by performance in accordance with its terms or by a writing
signed by the Parties hereto.
13.3 Effect.
This Agreement shall inure to the benefit of, and be
binding upon, the Parties hereto and their respective heirs, successors,
assigns, executors and administrators.
13.4 Non-Exclusive Rights.
The rights and obligations of the Employee under this
Agreement are non-exclusive, and this Agreement shall not be construed to
prevent the Corporation from simultaneously retaining, contracting with, or
otherwise obtaining professional services from any other person or entity.
13.5 Assignment.
This Agreement may not be assigned by the Employee.
13.6 Governing Law.
This Agreement shall be governed by and construed in
accordance with the laws of the State of state of incorporation.
- 10 -
<PAGE>
13.7 Severability.
In the event any paragraph or provision of this Agreement
is found to be void and unenforceable by a court of competent jurisdiction, the
remaining provisions of this Agreement shall nevertheless be binding upon the
parties with the same effect as though the void or unenforceable part had been
severed and deleted.
13.8 Notice.
Any notice hereunder shall be in writing and shall be
given to the Parties at their respective addresses set forth herein (or to such
other address as such Party may have fixed by notice; provided however that any
notice of change of address shall be effective only upon receipt) by certified
mail, return receipt requested, and shall be deemed to have been given on the
third (3rd) day following the day so mailed.
13.9 Paragraph Headings.
The paragraph headings contained in this Agreement are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the Parties have executed this Agreement as
of the date set forth below.
NEW MEDICAL PRACTICE, P.C.
By: /s/ WILLIAM KEDERSHA
Dated: 8/27/96 -----------------------------
---------- Secretary
/s/ GARY DANZIGER
--------------------------------
Gary Danziger, R.P.T.
1 Crooked Mile Road
--------------------------------
Address
Westport, CT 06880
--------------------------------
Dated: 9/2/96
----------
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AGREEMENT OF SALE
AGREEMENT OF SALE, made July 16, 1997, between Peter M. Saadeh, M.D. ("Saadeh"),
a licensed New York physician ("Seller"), and SternCo Management, Inc., as
authorized representative of Oak Tree Medical Systems, Inc., a Florida
corporation located at 1601 Belvedere Road, Suite 500E, West Palm Beach, Florida
33406 ("Purchaser").
WITNESSETH:
WHEREAS, Purchaser desires to acquire, and Seller desires to sell, the assets of
the physical therapy and rehabilitation practice (the "Practice") owned and
operated by Seller as a sole proprietorship upon the terms and conditions
hereinafter set forth, and
WHEREAS, Peter Saadeh, M.D. is the owner of the Practice currently located at
Suite 367, 5 World Trade Center, New York, New York, 10048, and
WHEREAS, Peter M. Saadeh, M.D. is the medical manager of the Practice.
NOW, THEREFORE, in consideration of the covenants and agreements hereafter set
forth, and other valuable consideration, the receipt and sufficiency of which
hereby is acknowledged, the parties hereto agree as follows:
1. AGREEMENT TO SELL. Seller agrees to sell, transfer and deliver to Purchaser,
and Purchaser agrees to purchase, upon the terms and conditions hereinafter set
forth, all of the assets of the practice as noted herein.
2. THE ASSETS. It is the understanding of the parties that Seller is the owner
of the following assets (the "Assets"):
(a) the equipment, patient files, name and general assets described
in Exhibit A-1 hereto and all similar equipment acquired or owned
by the Practice on or before the closing date (the "General
Assets");
(b) the furniture, fixtures and improvements described in Exhibit A-2
hereto and all similar items acquired or owned by the Practice on
or before the closing date (the "General Assets");
(c) the leases described in Exhibit A-3 hereto (the "Leases");
(d) the equipment leases, contracts and agreements described in
Exhibit A-4 hereto (the "Contracts");
(e) the bank accounts, lines of credit and safe deposit boxes
(including a list of the persons authorized to access the bank
accounts and safe deposit boxes) described in Exhibit A-5 hereto
(the "Bank Accounts and Boxes");
<PAGE>
Notwithstanding anything to the contrary contained herein, there shall be
excluded from the Assets, (i) all cash on hand and in Seller's bank accounts and
(ii) accounts receivable.
3. PURCHASE PRICE. The purchase price to be paid by Purchaser is Four Hundred
Thousand Dollars ($400,000.00).
A. The purchase price shall be paid as follows:
(a) Seller hereby acknowledges receipt of Twenty-Five Thousand
Dollars ($25,000.00) as a deposit made by Purchaser.
(b) Upon the execution of this Agreement by Seller and
Purchaser, Purchaser shall pay an additional Twenty-Five
Thousand dollars ($25,000.00) to Seller.
(c) Fifty Thousand Dollars ($50,000.00) at the Closing (or
such other amount as may be mutually agreed upon by the
parties prior to Closing).
(d) Three Hundred Thousand Dollars ($300,000.00) at the
Closing by giving Seller a Promissory Note (the "Note")
payable over five (5) years, at eight percent (8%) simple
interest per annum, payable quarterly, secured by the
furniture, fixtures and equipment of the Practice (the
"FF&E"), the form of which is attached as Exhibit B. IN NO
CASE SHALL PURCHASER BE RESPONSIBLE FOR ANY INDEBTEDNESS
OF SELLER OTHER THAN AS INDICATED HEREIN.
B. The purchase price shall be allocated as described in Exhibit A-6
hereto.
C. The Note shall be reduced in accordance with the formula set forth
below:
(i) if the Practice produces at least $1,100,000 in legitimate
billings ("Billings") in the first year post-closing, then
there shall be no offset against the Note; and
(ii) if the Practice produces less than $1,100,000 in Billings
in the first year post-closing, then there shall be an
offset against the Note payments due to Seller, in the
amount of $100,000.00, to be offset against the Note
payments due to Seller in years 2-5, with an equal offset
amount to be applied against each installment due under
the Note in years 2-5.
4. THE CLOSING. The "closing" means the settlement of the obligations of
Seller and Purchaser to each other under this agreement, including the payment
of the purchase price to Seller as provided in Article 3 hereof and the delivery
of the closing documents provided for in Article 5 hereof. The closing shall be
held at a location agreed upon by the parties and shall take place on or before
July 31, 1997 (the "Closing Date").
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<PAGE>
5. CLOSING DOCUMENTS. At the closing Seller shall execute and deliver to
Purchaser:
(a) an Assignment of the rights of the lessees under the Leases;
(b) an opinion of Seller's counsel, Donald A. Anderson of 900
Hicksville Road, Massapequa, NY, 11758 dated as of the
closing date, in form and substance satisfactory to
Purchaser's counsel;
(c) Restrictive Covenant as enumerated in Article Ten (10);
(d) Seller's Performance Agreement;
(e) statements executed by Seller, releasing and indemnifying
Purchaser from any and all obligations and liabilities of
Seller, other than those specifically assumed herein; and
(f) such other instruments and information in form and substance
satisfactory to Purchaser's counsel as may be necessary or
proper to transfer to Purchaser good and marketable title to
all other ownership interests in the Assets to be
transferred under this agreement.
(g) An opinion of Purchaser's counsel dated as of the Closing
Date in form and substance satisfactory to Seller's counsel.
At the closing Seller shall deliver to Purchaser all keys for the businesses. If
any keys for the businesses or Assets are held by employees or others, Seller
shall identify such individuals, their addresses and their relationship to the
Seller. Seller shall do all further acts and things as may be necessary, or
reasonably requested by Purchaser, to consummate the transactions contemplated
by this Agreement, including the acquisition of and possession of the Assets.
Seller shall advise Purchaser of, and cause to be delivered to Purchaser, all
applicable trade secrets and proprietary information pertaining to the Assets of
the businesses.
At the closing Purchaser shall execute and deliver to Seller:
(i) an Assumption of the obligations of the lessees under the Leases
and Equipment Contracts;
(ii) the Promissory Note and appropriate Security Agreement evidencing
the $300,000 debt and the security interest in the FF&E
guaranteed by Oak Tree Medical Systems, Inc.; and
(iii)reciprocal documentation and Counsel's opinion as listed in
subparagraphs (b), (e) and (g), above.
Except as expressly provided herein, Purchaser shall not be obligated to pay or
perform any obligations or liabilities of Sellers including, without limitation,
obligations or liabilities of Seller
3
<PAGE>
to their creditors or any legal, accounting, brokerage or finder's fees or any
taxes or other expenses in connection with this agreement or the consummation of
the transactions contemplated hereby.
6. CLOSING ADJUSTMENTS. The following items shall be apportioned as of midnight
of the day preceding the closing date:
(a) rent, including any additional rent, under the Real Estate
leases or Equipment leases;
(b) taxes and applicable common charges under the leases;
(c) water and sewer charges;
(d) utilities, as applicable; and
(e) employee salaries and benefits.
Any errors or omissions in computing apportionments shall be corrected after the
Closing, with both parties fully cooperating.
7. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller represents and warrants to
Purchaser as follows:
(a) Seller has full power and authority to own his assets and to
conduct his business and the Practice as now carried on, and
to carry out and perform his undertakings and obligations as
provided herein. The execution and delivery by Seller of
this Agreement and the consummation of the transactions
contemplated herein do not and will not conflict with or
result in any breach of any condition or provision of, or
constitute a default under, or result in the creation or
imposition of any lien, charge or encumbrance upon the
Assets by reason of the provisions of any contract, lien,
lease, agreement, instrument or judgment to which Seller is
a party, or which are or purport to be binding upon Seller
or which affect or purport to affect the Assets. No further
action or approval, corporate or otherwise, is required in
order to constitute this Agreement the binding and
enforceable obligation of Seller.
(b) No action, approval, consent or authorization, including
without limitation any action, approval, consent or
authorization of any government or quasi-governmental agency
commission, board, bureau or instrumentality, is necessary
for Seller to constitute this agreement the binding and
enforceable obligation of Seller or to consummate the
transactions contemplated hereby.
4
<PAGE>
(c) Seller is the owner of and has good and marketable title to
the Assets, free of all liens, claims and encumbrances,
except as set forth herein.
(d) There are no violations, potential claims of violations or
questions of irregularity regarding any law or governmental
rule or regulation pending or to the best of Seller's
knowledge, threatened against Seller, or the Assets. Seller
has complied with all laws and governmental rules and
regulations applicable to the business or the Assets. Seller
has duly notified all insurance carriers or third party
payers of any suspected or known claims or potential claims
which may be asserted against Seller or the Assets.
(e) There are no judgments, liens, suits, actions or proceedings
pending or, to the best of Seller's knowledge, threatened
against Seller, or the Assets. Neither Seller, nor the
Assets are a party to, subject to or bound by any agreement
or any judgment or decree of any court, governmental body or
arbitrator which would conflict with or be breached by the
execution, delivery or performance of this agreement, or
which could prevent the carrying out of the transactions
provided for in this agreement, or which could prevent the
use by Purchaser of the Assets or adversely affect the
conduct of the Practice by Purchaser.
(f) Seller has not entered into, and the Assets are not subject
to, any: (i) written contract or agreement for the
employment of any employee of the business; (ii) contract
with any labor union or guild; (iii) pension,
profit-sharing, retirement, bonus, insurance, or similar
plan with respect to any employee of the business; or (iv)
similar contract or agreement affecting or relating to the
Assets.
(g) At the time of the closing, there will be no (secured or
unsecured) creditors of Seller, except for general business
creditors or equipment lessors. General business creditors
and equipment lessors are listed in Exhibit A-4 attached
hereto. Except as set forth herein, Seller shall be liable
for all other obligations incurred by Seller prior to
closing.
(h) The Lease or Sublease is in full force and effect and
without any default by Seller thereunder. All copies of the
Lease provided by Seller to Purchaser are true and complete
copies of the original Lease.
(i) All Contracts and Equipment Leases are in full force and
effect and without any default by Seller or thereunder. All
copies of the Contracts and Leases provided by Seller to
Purchaser are true and complete copies of the original
Contracts. Seller is not indebted under any executory
Contracts or Leases, except as may be set forth in Exhibit
A-4 hereto. All owned equipment is unsecured and debt-free.
5
<PAGE>
(j) Seller has filed each tax return, including without
limitation all income, excise, property, capital gain,
sales, franchise and license tax returns, required to be
filed by Seller prior to the date hereof. Each such return
is true, complete and correct, and Seller has paid all
taxes, assessments and charges of any governmental authority
required to be paid by them and have created reserves or
made provision for all taxes accrued but not yet payable. No
government is now asserting, or to Seller's knowledge
threatening to assert, any deficiency or assessment for
additional taxes or any interest, penalties or fines with
respect to Seller. Seller shall hold Purchaser harmless and
indemnify Purchaser against all claims for taxes due from
and owed by Seller.
(k) The attached financial statements in Exhibit C are true and
accurate. The financial statements fairly and correctly
present the financial position of the Seller and will so
represent such as of the date of closing. Seller's
representations and warranties as to the financial condition
of the business shall survive closing.
(l) Compliance with law. Seller has not received any notice or
notification from any court or governmental agency,
authority or body that it is in violation of or not in
compliance with any foreign or domestic (federal, state or
local) laws, statutes, ordinances, rules, regulations,
decrees, orders, permits or other similar items (including,
but not limited to, those relating to occupational safety
and health, employment discrimination, environmental
protection and conservation) or that upon the passage of
time it will be in violation of any of the foregoing. To the
best knowledge of Seller, the conduct of business by Seller
on the date hereof and as of the Closing Date does not and
will not violate any foreign or domestic (federal, state or
local) laws, statutes, ordinances, rules, regulations,
decrees, orders, permits or other similar items in force on
the date hereof that full compliance therewith would have a
material adverse effect on the business, assets, condition
(financial or otherwise) or prospects of Seller. There is no
present or pending zoning or use restriction known to the
Seller that adversely affects the Practice now conducted or
presently proposed to be conducted by Seller.
(m) The Medicare and Medicaid Programs. Seller is eligible to
receive payment under Title XVIII of the Social Security Act
as a Part B provider, under Title XI of such Act and the New
York Medicaid State Plan. Seller has timely filed, in a
complete and correct manner, all requisite claims and other
reports required to be filed in connection with all state
and federal Medicare and Medicaid programs due on or before
the date hereof. There are no claims, actions, payment
reviews, or appeals pending or to the best of Seller's
knowledge, threatened before any commission, board or
agency, including, without limitation, any intermediary or
carrier, the Administrator of the Health Care Financing
Administration, or the New York Department
6
<PAGE>
of Health and rehabilitative Services or any other state or
federal agency with respect to any Medicare or Medicaid
claims filed on or before the Closing or Program compliance
matters, which would adversely affect the Practice, the
operation of the Practice or the consummation of the
transactions contemplated hereby. No validation review or
program integrity related to the Business (other than
normal, routine reviews) has been conducted by any
commission, board or agency in connection with the Medicare
or Medicaid program, and no such reviews are scheduled,
pending or, to the best of Seller's knowledge, threatened
against the Practice, Dr. Saadeh or Seller or the
consummation of the transactions contemplated hereby.
(n) Fraud and Abuse. Neither Seller nor persons and entities
providing professional services for the Practice have
engaged in any activities which are prohibited under U.S.C.
Sec. 1320a - 7b or the regulations promulgated thereunder
pursuant to such statutes, or any other related state or
local statutes and regulations, or which are prohibited by
Rules of Professional Conduct, including but not limited to
the following:
(a) knowingly and willfully making or causing to be made a
false statement or representation of a material fact in
any application for any benefit or payment;
(b) knowingly and willfully making or causing to be made
any false statement or representation of a material
fact for use in determining rights to any benefit or
statement or representation of a material fact for use
in determining rights to any benefit or payment;
(c) failing to disclose knowledge by a claimant of the
occurrence of any event affecting the initial or
continued right to any benefit or payment on its, his
or her own behalf or on behalf of another, with intent
to fraudulently secure such benefit or payment; and
(d) knowingly and willfully soliciting or receiving any
remuneration, kickback, bribe or rebate, directly or
indirectly, overtly or covertly, in cash or in kind, or
offering to pay or receive such remuneration in return
for (a) referring an individual to a person for the
furnishing or arranging for the furnishing of any item
or service for which payment may be made in whole or in
part by Medicare or Medicaid, or (b) purchasing,
leasing or ordering, or arranging for or recommending
purchasing, leasing or ordering, any goods, facility,
service or item for which payment may be made in whole
or in part by Medicare or Medicaid.
(o) Legal Compliance. To the best of Seller's knowledge, Seller
and its respective employees and shareholders, including,
but not limited to, Dr.
7
<PAGE>
Saadeh, have not engaged in any activities which are
prohibited under Section 1320a - 7B of Title 42 of the
United States Code or the regulations promulgated
thereunder, or related state or local statutes or
regulations, or which are prohibited by rules of
professional conduct, including, but not limited to, the
following: (i) knowing and willfully making or causing to be
made any false statement or representation of a fact in any
application for any benefit or payment; (ii) any failure by
a claimant to disclose knowledge of the occurrence of any
event affecting the initial or continued right to any
benefit or payment on their own behalf or on behalf of
another, with the intent to fraudulently secure such benefit
or payment; and (iii) knowingly and willfully soliciting or
receiving any remuneration (including any kickback, bribe or
rebate), directly or indirectly, overtly or covertly, in
cash or in kind, or offering to any to receive such
remuneration (a) in return for referring an individual to a
person for the furnishing or arranging for the furnishing of
any item or service for which payment may be made in whole
or in part by the Medicare or Medicaid programs, or (b) in
return for purchasing, leasing or ordering, or arranging for
or recommending purchasing, leasing or ordering, any goods,
facility, service or item for which payment may be made in
whole or in part by the Medicare or Medicaid programs. To
the best of Seller's knowledge, no physician or physical
therapist currently employed by or acting as an independent
contractor for Seller (a) has had his or her license to
practice medicine in any jurisdiction denied, surrendered,
limited, suspended, revoked or subject to probationary
conditions or is subject to any pending proceedings
regarding any of the foregoing, (b) has had his or her
federal or state Drug Enforcement Agency controlled
substance authorization denied, revoked, suspended, reduced
or not renewed or has been subject to institution of, or is
subject to any pending, proceedings regarding any of the
foregoing, (c) has had his or her membership in any local
state or national medical professional society or
organization revoked, suspended or not renewed or is subject
to any pending proceedings regarding any of the foregoing,
(d) has received treatment for alcoholism, drug abuse,
sexual misconduct or psychiatric disorders, or (e) has been
the subject of administrative sanctions or been suspended
from or lost eligibility for participating in Medicare,
Medicaid or other governmental or non-governmental medical
insurance programs, or is subject to any pending proceedings
regarding any of the foregoing.
At the closing Seller shall execute and deliver an affidavit setting forth the
above representations.
8. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents and
warrants to Seller as follows:
(a) Purchaser is a professional corporation organized under the laws
of New York, and is duly qualified to do business in New York as
a physical therapy practice
8
<PAGE>
and as a physical medicine practice. Purchaser has full power and
authority to carry out and perform its undertakings and
obligations as provided herein. The execution and delivery by
Purchaser of this Agreement and the consummation of the
transaction contemplated herein have been duly authorized by the
Board of Directors of Purchaser and will not conflict with or
breach any provision of the Certificate of Incorporation or
Bylaws of Purchaser. No further action or approval, corporate or
otherwise, is required in order to constitute this Agreement the
binding and enforceable obligation of Purchaser.
(b) No action, approval, consent or authorization, including, without
limitation any action, approval, consent or authorization of any
governmental or quasi-governmental agency, commission, board,
bureau or instrumentality, is necessary for Purchaser to
constitute this Agreement the binding and enforceable obligation
of Purchaser or to consummate the transactions contemplated
hereby.
9. CONDITIONS TO CLOSING. The obligations of Purchaser to Close hereunder are
subject of the following conditions:
(a) All of the terms, covenants and conditions to be complied with or
performed by Seller under this Agreement on or before the Closing
shall have been complied with or performed in all material
respects.
(b) All representations or warranties of Seller herein are true in
all material respects as of the Closing Date. Such
representations and warranties shall also survive Closing.
(c) The results of a financial audit shall be satisfactory, as
required by Purchaser.
(d) All Assets shall be in good working order, as applicable, and
have been calibrated within the past twelve (12) months.
(e) On the Closing Date, there shall be no liens or encumbrances
against the Assets.
(f) The Practice has been conducted only in the ordinary course of
business. No contracts or purchase agreements/orders will have
been entered into, other than in the ordinary course of business.
No expenditures or credit purchase will be made by Seller other
than in the ordinary course of business.
(g) Seller, and his representatives, and advisors will supply, upon
request by Purchaser and its representatives, such pertinent
information as may be required by Purchaser in order to conduct
its due diligence survey of Seller. It is agreed that any
documents or information provided hereunder shall be kept in full
and complete confidence.
(h) Peter B. Saadeh, M.D. will agree to be employed by Purchaser as
evidenced by an Employment Agreement satisfactory to the
Purchaser to be signed at Closing
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<PAGE>
(or thereafter as agreed to by the parties), whereby Saadeh will
serve as a medical practitioner of the purchased facility. Such
employment term shall be a minimum of six months.
(i) Ginette Saadeh will be employed by Purchaser on terms
satisfactory to the Purchaser as an Assistant Practice Manager,
at a salary of $50,000 per annum for six (6) months or as
mutually agreed upon consistent with fair market rates, as
evidenced by an Employment Agreement to be signed at closing (or
thereafter as agreed to by the parties).
(j) Purchaser shall secure a satisfactory Lease Agreement for the
Practice for a term of at least four (4) years.
(k) The Board of Directors of the Purchaser will have reviewed the
transaction and the deal documents and deemed them to be
satisfactory.
(l) All Schedules and Exhibits shall have been completed by Seller
and deemed satisfactory by Purchaser.
If this Agreement is terminated because any of the above have not been
satisfied, which each party shall the right to do, Seller shall return any
payments or deposits made by Purchaser on account of the purchase price,
whereupon all rights of Purchaser hereunder and to the Practice shall terminate,
and neither Seller nor Purchaser shall have any further claim against the other
hereunder.
10. RESTRICTIVE COVENANT NOT TO COMPETE. Except as set forth in Schedule 10,
Seller will not, for a period of four (4) years from the date of closing,
either directly or indirectly, engage in the practice of physical medicine
or physical therapy or related services, within lower Westchester County,
NY (up to and including latitude of White Plains, NY), Fairfield County, CT
and within a ten (10) mile radius of Seller's current address as listed
herein. Seller shall execute at Closing, such documents as will evidence
this surviving provision. To the extent a court of competent jurisdiction
determines this provision to be excessively restrictive, the parties agree
to abide by any modification acceptable to such court.
11. INDEMNIFICATION. Each party hereto shall indemnify and hold the other
parties harmless from and against all liability, claim, loss, damage or
expense, including reasonable attorneys' fees, incurred or required to be
paid by such other parties by reason of any breach or failure of observance
or performance of any representation, warranty, covenant or other provision
(including lists and Exhibits) of this agreement by such party. Seller
shall indemnify and hold Purchaser harmless against all actions, suits,
proceedings, judgments, costs and expenses incurred by or levied against
Purchaser, due to Seller's prior acts, omissions, negligence or other
wrongful conduct, or the operation of the Practice prior to Closing.
Purchaser shall indemnify and hold Seller harmless against all actions,
suits, proceedings, judgments, costs and expenses incurred by or levied
against
10
<PAGE>
Seller, due to Purchaser's acts, omissions, negligence or other wrongful
conduct, or the operation of the Practice after Closing.
12. RISK OF LOSS. The risk of loss to the Assets of the business and the
Practice, until Closing is assumed and shall be borne by Seller. Seller
agrees to keep all of his Assets fully insured against any loss, either by
fire, theft or casualty, to the date of Closing. In the event that prior to
Closing such Assets are totally or substantially damaged by reason of fire,
theft, casualty, or breakage, Seller will repair or replace such Assets at
or prior to Closing or Purchaser may, in its sole discretion terminate the
within transaction. In such case, all money heretofore deposited with
Seller or Seller's representative shall be refunded to Purchaser and the
parties shall be released from any further liability hereunder. If the
Purchaser elects to consummate this transaction despite such loss or
damage, it may do so by paying the purchaser price set forth herein,
reduced by any insurance proceeds received by Seller.
13. BROKERAGE. The parties hereto represent and warrant to each other that they
have not dealt with any broker or finder in connection with this agreement
other than Gary Weissen. Seller shall be solely responsible for and shall
pay at closing all commission, fees, expenses and charges due or owing to
the Broker in connection with this transaction, pursuant to a separate
agreement between the Seller and Broker. Seller shall indemnify, defend and
hold Purchaser harmless from and against any loss, cost, expense, claim or
liability (including, without limitation, reasonable attorney's fees)
arising under or in respect of any claim by any person or entity for any
commission, fee or expense in respect of the transaction contemplated by
this Agreement. The provisions of this Article shall survive the
expiration, termination or cancellation of this Agreement, but shall not be
construed as a covenant for the benefit of any third party.
14. NOTICES. All notices, demands and other communications required or
permitted to be given hereunder shall be in writing and shall be deemed to
have been properly given if delivered by hand or by registered or certified
mail, return receipt requested, with postage prepaid, to Seller's Attorney,
Donald A. Anderson, 900 Hicksville Road, Massapequa, NY, 11758, and to
Buyer's attorney. The respective attorneys for the parties hereby are
authorized to give notice required or permitted hereunder and to agree to
adjustments of the closing.
15. SURVIVAL. The representations, warranties and covenants contained herein or
in any document, instrument, certificate or schedule furnished in
connection herewith shall survive the delivery of me Bill of Sale and shall
continue in full force and effect after the closing, except to the extent
waived in writing.
16. FURTHER ASSURANCES. In connection with the transactions contemplated by
this Agreement, the parties agree to execute and deliver such further
instruments and to take such further actions, as may be reasonably
necessary or proper to effectuate and carry out the transactions
contemplated in this Agreement.
11
<PAGE>
17. CHANGES MUST BE IN WRITING. No delay or omission by either Seller or
Purchaser in exercising any right shall operate as a waiver of such right
or any other right. This Agreement may not be altered, amended, changed,
modified, waived or terminated in any respect or particular unless the same
shall be in writing signed by the party to be bound. No waiver by any party
of any breach hereunder shall be deemed a waiver of any other or subsequent
breach.
18. CAPTIONS AND EXHIBITS. The captions in this Agreement are for convenience
only and are not to be considered in construing this Agreement. The
Exhibits annexed to this Agreement are an integral part of this Agreement,
and where there is any reference to this Agreement, it shall be deemed to
include said Exhibits.
19. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
20. BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, executors,
administrators, successors and assigns.
21. CANCELLATION. Purchaser reserves the right to cancel this Agreement at any
time prior to Closing, without penalty, if any negative disclosure is
discovered regarding Sellers, or the Assets, which would materially affect
the value of Assets. Purchaser's right to cancel under this provision shall
be null and void subsequent to actual closing.
22. CONFIDENTIALITY. Each party acknowledges and agrees that any information or
data it has acquired from the other party, not otherwise properly in the
public domain, was received in confidence. Each party hereto agrees not to
divulge, communicate or disclose, except as may be required by law or for
the performance of this Agreement (including conducting due diligence or
notifying a party's lender) or use to detriment of the disclosing party or
for the benefit of any other person or persons, or misuse in any way, any
confidential information of the disclosing party concerning the subject
matter hereof, including any trade or business secrets of the disclosing
party and any technical or business materials that are treated by the
disclosing party as confidential or proprietary, including without
limitation information (whether in written, oral or machine readable form)
concerning: general business operations: methods of doing business,
servicing clients, client relations, and of pricing and making charge for
services and products; financial information, including costs, profits and
sales; marketing strategies; business forms developed by or for the
disclosing party; names of suppliers, personnel, clients and potential
clients; negotiations or other business contacts with suppliers, personnel,
clients and potential clients; form and content of bids, proposals and
contracts; the disclosing party's internal reporting methods; technical and
business data and documentation software programs, however embodied;
diagnostic techniques; and information obtained by or given to the
disclosing party about or belonging to third parties.
23. ARBITRATION. In the event of any dispute arising out of or related to this
Agreement, such dispute shall be resolved by arbitration in New York, New
York, under the rules of the American Arbitration Association then
obtaining.
12
<PAGE>
24. OFFSET PROVISIONS. Notwithstanding any other provisions of this Agreement
or any other agreement referenced herein or contemplated hereby, in the
event Seller becomes obligated to pay sums to Purchaser or any of the
documents or agreements referenced herein or contemplated hereby (whether
as a result of indemnity, breach of contract or otherwise), Purchaser shall
be entitled to, and shall have the right to, reduce and offset payments due
pursuant to this Agreement or any of the documents or agreements referenced
herein or contemplated hereby.
25. ADJUSTMENT OF PURCHASE PRICE. The purchase price shall be adjusted on the
Closing Date (i) to reduce the purchase price by the amount allocated to
any damaged or destroyed Assets; (ii) to account for a proration of
personal property taxes on the Assets and for any deposits held by Seller
on the Closing Date; and (iii) to pay the Seller the amount of any utility,
rental and similar deports of Seller held by others that are transferred to
Purchaser. Three (3) business days prior to the Closing Date, Seller will
provide Purchaser with a statement of adjustments showing all proposed
adjustments to the purchase price, which statement of adjustments will
include all reasonable back up documentation for the proposed adjustments.
Purchaser and Seller will work to finalize all required adjustments prior
to the Closing Date. Nothing in this Section shall limit the rights to
terminate this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement the date first
above written.
SELLER:
By: /s/ PETER B. SAADEH
------------------------------------
Peter B. Saadeh, M.D.
PURCHASER:
STERNCO MANAGEMENT, INC.
As authorized representative of Oak Tree
Medical Systems, Inc.
By: /s/ FRED STERNBERG
------------------------------------
Name: Fred Sternberg
Title: President
By: /s/ GARY DANZIGER
------------------------------------
Gary Danziger
Secretary
Oak Tree Medical Practice, P.C.
13
AGREEMENT
AGREEMENT dated as of the ____ day of August 1997, by and between Burton
Dubbin, residing at 21394 Marina Cove Road, Unit H-11, North Miami Beach,
Florida 33180 ("Dubbin") and Oak Tree Medical Systems, Inc., having a principal
place of business at 163-03 Horace Harding Expressway, Flushing, New York 11365
(the "Company").
WITNESSETH:
WHEREAS, Dubbin serves as an officer of the Company; and
WHEREAS, Oak Tree and Dubbin are parties to a Stock Option Agreement
dated as of December 3, 1996 (the "Option Agreement"), pursuant to which Dubbin
has been granted options (the "Options") to purchase three hundred seventy five
thousand (375,000) shares of the Company's common stock (the "Option Shares");
and
WHEREAS, the parties desire that Dubbin resign as an officer of the
Company and become a consultant to the Company, and that the Option Agreement be
amended, upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein set forth and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto, intending to be
legally bound, agree as follows:
1. Resignation as Officer. Dubbin hereby resigns as an officer of the
Company effective upon execution of this Agreement.
2. Amendments to Option Agreement. The Option Agreement, a copy of which
is annexed hereto as Exhibit A, is hereby amended as follows:
(a) The last sentence of Section 2.1 is hereby deleted in its
entirety and replaced by the following: "The number and kind of shares issuable
upon exercise of the Options and the Exercise Price shall be adjusted upon the
occurrence of the events and in the manner provided on Exhibit B to this
Agreement".
(b) Section 2.2 of the Option Agreement is hereby deleted in its
entirety and replaced by the following: "The Options shall vest and become
exercisable immediately upon execution of this Agreement.".
(c) Section 2.3 of the Option Agreement is hereby deleted in its
entirety and replaced by the following: "To the extent not therefore exercised,
the Options shall terminate and expire at 5:00 p.m., New York time, ten years
from the date hereof.".
<PAGE>
(d) Article 5 of the Option Agreement is hereby amended to the
extent of providing that the Company's address for notices shall be 163-03
Horace Harding Expressway, Flushing, New York 11365.
(e) Section 6.6 of the Option Agreement is hereby amended by
permitting arbitration thereunder to be brought before the American Arbitration
Association of New York, New York or Miami, Florida. Whether such arbitration
shall be maintained in New York or Florida shall be the choice of the party
instituting the arbitration proceeding.
3. Appointment of Consultant. Oak Tree hereby engages Dubbin or his
designee ("Consultant") and Consultant hereby agrees to render services to the
Company as a management consultant, strategic planner and advisor.
(a) During the term of this Agreement Consultant shall provide
advice to, undertake for and consult with the Company concerning management,
strategic planning, communicating and negotiating with security holders,
corporate organization and structure, identification of business opportunities
and other general corporate and business matters in connection with the
operation of the business of the Company.
(b) In the event Dubbin designates an entity to serve as
Consultant hereunder, such entity shall accept the terms of the consulting
provisions set forth in this Section 3, in writing, and such writing shall
covenant and agree that the consulting services to be provided by Consultant
shall be rendered by Dubbin.
(c) As consideration for its consulting services hereunder, the
Company agrees to compensate Consultant as described in Section 4.
(d) The term of Consultant's consulting services under this
Agreement shall commence on the date hereof and shall continue for a period of
twenty four (24) months. Except as otherwise specifically provided in this
Agreement, no termination of Consultant's consulting services hereunder shall
affect the Company's other obligations under this Agreement, including without
limitation, the Company's obligations under Sections 2, 5 and 7.
(e) Consultant's services under this Section 3 shall terminate
upon the occurrence of any of the following events: (i) the death of Dubbin:
(ii) the disability of Dubbin, which, for purposes hereof shall mean
Consultant's inability, due to the physical or mental impairment of Dubbin, to
perform the consulting services required hereunder for a period of thirty (30)
consecutive days during any consecutive ninety (90) day period; or (iii)
Consultant's failure to perform the consulting duties required hereunder other
than as described in subparagraph (ii) of this paragraph (e). In the event of
the termination of Consultant's services under this Section 3(e), the Company's
obligations under Sections 3 and 4 shall terminate, other than to pay Consultant
all amounts due to it up to the date of termination.
(f) Consultant and the Company hereby acknowledge that Consultant
is an independent contractor. Consultant shall not hold itself out as, nor shall
it take any action from
- 2 -
<PAGE>
which others might infer, that it is a partner of, agent of or a joint venturer
of the Company. Consultant shall have no authority to bind the Company to any
third party.
4. Compensation to Consultant. As consideration for Consultant's
consulting services, the Company shall compensate Consultant as follows:
(a) The Company shall pay Consultant a fee in the amount of
twelve thousand five hundred dollars ($12,500.00) per month. Such fee shall be
payable on or before the first day of each month, commencing in the month
following the month in which this Agreement is executed, and shall continue for
twenty three (23) consecutive monthly payments thereafter.
(b) Consultant shall be reimbursed by the Company for such
reasonable out-of-pocket expenses as Consultant may incur in performing its
services under this Agreement.
(c) The Company shall issue to Consultant an aggregate of one
hundred and twenty-five thousand (125,000) unregistered shares of the Company's
Common Stock (the "Shares"), as follows: (i) a certificate for twenty-five
thousand (25,000) of the Shares, registered in the name of Consultant, shall be
delivered to Consultant simultaneous with the execution of this Agreement; and
(ii) twenty (20) certificates registered in the name of Consultant, each
evidencing five thousand (5,000) of the Shares, shall be delivered to Atlas,
Pearlman, Trop & Borkson, P.A. (the "Escrowee"), simultaneous herewith, to be
held by the Escrowee in accordance with the terms of the Form of Escrow
Agreement attached hereto as Exhibit C.
(d) Promptly following the execution of this Agreement, but in no
event later than thirty (30) days following the date hereof, the Company shall
prepare and file a registration statement on Form S-8 (or successor or other
applicable form) under the Securities Act of 1933, as amended (the "Act"). The
Company shall use its best efforts to cause such registration statement to
become effective. Such registration statement shall cover the Shares and, upon
the effective date thereof and subject to the other terms and conditions hereof,
shall entitle Consultant to publicly sell the Shares.
(e) Notwithstanding the foregoing:
(i) Dubbin may not sell any of the Shares being held in
the escrow described in paragraph (c) of this Section 4, or any
interest therein, prior to the release of such Shares from
escrow;
(ii) Dubbin may not exercise the right to vote any of the
Shares being held in the escrow described in paragraph (c) of
this Section 4, prior to the release of such Shares from escrow;
and
(iii) the Company shall neither accrue nor pay dividends
on any of the Shares being held in the escrow described in
paragraph (c) of this Section 4, prior to the release of such
Shares from escrow.
- 3 -
<PAGE>
(f) In the event that the Company terminates Consultant's
consulting services hereunder other than for "Cause" (as defined in Section 1.2
of the Option Agreement), or Consultant terminates its consulting services
hereunder for "Good Reason" (as defined in Section 1.5 of the Option Agreement),
then (i) all of the Shares then remaining in the escrow described above shall
immediately be delivered to Consultant free and clear of the restrictions set
forth in the Escrow Agreement, and (ii) all unpaid compensation under paragraphs
(a) and (b) of this Section 4 due through the end of the term of Consultant's
consulting services hereunder (as if such termination had not occurred) shall
become immediately due and payable.
5. Covenant of the Company. The Company hereby covenants and agrees
that, for a period of two years following the date hereof, it will not effect a
"reverse split" of its outstanding Common Stock without the prior written
consent of Dubbin.
6. Confidentiality. Dubbin will not disclose to any other person, firm
or corporation, nor use for its own benefit, during or after the term of this
Agreement, any trade secrets or other information designated as confidential by
the Company which is or has been acquired by Dubbin in the course of its
performing services to the Company. (A trade secret is information not generally
known to the trade which gives the Company an advantage over its competitors.
Trade secrets can include, by way of example, products or services under
development, production methods and processes, sources of supply, customer
lists, marketing plans and information concerning the filing of pendency of
patent applications). Any management advice rendered by Dubbin pursuant to this
Agreement may not be disclosed publicly in any manner without the prior written
approval of the Company. The provision shall be binding upon Consultant to the
extent that Dubbin designates an entity to perform consulting duties under
Section 3 hereof. The provisions of this Section 6 shall survive the termination
and expiration of this Agreement.
7. Indemnification. The Company agrees to indemnify and hold Dubbin
harmless from and against all losses, claims, damages, liabilities, costs or
expenses (including reasonable attorneys' fees (collectively the "Liabilities")
joint and several, arising out of this Agreement, whether or not Dubbin is a
party to such dispute. This indemnity shall not apply, however, and Dubbin shall
indemnify and hold the Company, its affiliates, control persons, officers,
employees and agents harmless from and against all liabilities attributable to
the negligence or willful misconduct of Dubbin in the performance of his
services hereunder which gave rise to the losses, claim, damage, liability, cost
or expense sought to be recovered hereunder.
8. Corporate Authorization. The Company hereby represents and warrants
that this Agreement has been duly authorized by the Company's Board of Directors
and constitutes the valid and binding obligation of the Company, enforceable
against it in accordance with its terms.
9. Assignment; Successors. Except as specifically set forth herein,
Dubbin's rights and duties under this Agreement may not be assigned without the
Company's consent, and any attempted assignment shall be void. Subject to the
foregoing, this Agreement shall be binding on the parties and their respective
successors or assigns.
- 4 -
<PAGE>
10. Severability. In the event that any term, provision or condition of
this Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remainder of this Agreement shall remain in full force and
effect and shall not be affected, impaired or invalidated thereby.
11. Miscellaneous. This Agreement sets forth the entire understanding of
the parties relating to the subject matter hereof, and supersedes and cancels
any prior communications, understandings and agreements between the parties.
This Agreement cannot be modified or changed, nor can any of its provisions be
waived, except by written agreement signed by all parties. This Agreement shall
be governed by the laws of the State of Florida. In the event of any dispute as
to the terms of this Agreement, the prevailing party in any litigation shall be
entitled to reasonable attorneys' fees.
- 5 -
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the day and year first above written.
OAK TREE MEDICAL SYSTEMS, INC.
By: /s/ GARY DANZIGER
--------------------------------------
Gary Danziger, Chief Operating Officer
/s/ BURTON DUBBIN
--------------------------------------
Burton Dubbin
- 6 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENT OF OPERATIONS CONTAINED
IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED MAY 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> MAY-31-1997
<CASH> 125,919
<SECURITIES> 0
<RECEIVABLES> 1,708,392
<ALLOWANCES> 860,123
<INVENTORY> 0
<CURRENT-ASSETS> 1,380,211
<PP&E> 539,695
<DEPRECIATION> 32,532
<TOTAL-ASSETS> 7,108,929
<CURRENT-LIABILITIES> 1,811,349
<BONDS> 0
0
0
<COMMON> 28,881
<OTHER-SE> 4,864,445
<TOTAL-LIABILITY-AND-EQUITY> 7,108,929
<SALES> 3,344,559
<TOTAL-REVENUES> 3,344,559
<CGS> 1,875,770
<TOTAL-COSTS> 5,329,670
<OTHER-EXPENSES> 777,054
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 403,723
<INCOME-PRETAX> (3,165,889)
<INCOME-TAX> (546,677)
<INCOME-CONTINUING> (3,165,889)
<DISCONTINUED> 0
<EXTRAORDINARY> 65,000
<CHANGES> 0
<NET-INCOME> (2,554,212)
<EPS-PRIMARY> (.99)
<EPS-DILUTED> 0
</TABLE>
